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The impact of liquidity risk in the Chinese banking system on the global commodity markets

Yonghwan Jo, Jihee Kim and Francisco Santos

Journal of Empirical Finance, 2022, vol. 66, issue C, 23-50

Abstract: We show that liquidity risk in the Chinese banking system, via the demand of commodities as collateral, affects commodity markets. Investors in China, to circumvent capital controls, import commodities, collateralize them, and use the loan proceeds to invest in domestic banking products. The Chinese banking system plays a crucial role in every step of this process. Thus, liquidity risk in the Chinese banking system may impact the demand of commodities as collateral. We find empirically that the liquidity risk affects excess returns and risk premium in commodity futures in Chinese and global markets. Our findings give new insights into commodity markets by unraveling their risk exposure to the Chinese interbank market due to the financialization of commodities.

Keywords: Financialization of commodities; Liquidity risk; Chinese interbank market; Maturity mismatch; Commodities as collateral; Commodity futures excess returns (search for similar items in EconPapers)
JEL-codes: F30 F38 G12 Q02 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.jempfin.2021.12.003

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