China's impact on commodities less than US - IMF
Friday, 11 May 2012 | 00:00
China's impact on world commodity markets was rising, but remained smaller than that of the US, International Monetary Fund economist Shaun Roache said in a working paper.
The views expressed in the working paper (WP) were those of the author and did not necessarily represent those of the International Monetary Fund (IMF) or IMF policy. WPs describe research in progress by the author and are published to elicit comments and to further debate.
China is becoming increasingly important for commodity markets. Its role in the market and its impact on world trade and prices varied by commodity; in particular, China had become the dominant importer of base metals and agricultural raw material, with a smaller, but growing role, in food and energy markets.
China is a large consumer of a broad range of primary commodities. As a percent of global production, China's consumption during 2010 accounted for about 20% of non-renewable energy resources, 23% of major agricultural crops, and 40% of base metals.
These market shares have increased sharply since 2000, mainly reflecting China's rapid economic growth. History has shown that as countries become richer, their commodity consumption rises at an increasing rate before eventually stabilising at much higher levels. This is often described as the S-curve.
"I find that shocks to aggregate activity in China have a significant and persistent short-run impact on the price of oil and some base metals. In contrast, shocks to apparent consumption (in part reflecting inventory demand) have no effect on commodity prices," Roache said.
Using vector auto-regressive (VAR) statistical techniques, Roach found that although China's impact on world commodity markets was rising, it remained smaller than that of the US. This was mainly due to the dynamics of real activity growth shocks in the US, which tended to be more persistent and had larger effects on the rest of the world.
"One caveat to these findings - and the results from studies that use similar VAR techniques - is that the effect of supply shocks may be understated. The finding that supply shocks have little price effects is counterintuitive and at odds with other empirical approaches. There appears to be strong evidence that periods of supply shortfalls - particularly those that are long-lasting - can have large effects on real commodity prices, but this is not well picked up by the techniques used in this paper," he said.
Lutz Kilian in 2009 suggested that precautionary demand (or the unexplained proportion of price variance) was soaking up supply effects as they were often anticipated in advance.
Looking ahead, commodity market developments would increasingly be determined by China - the only question was how big the China effect would be.
"Understanding how Chinese demand for commodities will change if and when its economy rebalances (away from investment and exports towards consumption) remains the biggest challenge for future research in this area," Roache concluded.
Source: Business LIVE
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