Impact of Monetary Supply on Chinese Nonferrous Metal Price Movement*

• Author: Zesheng Sun,Bianxia Sun
• DOI: http://doi.org/10.1111/asej.12111
• Date: 01 March 2017
• Published date: 01 March 2017

Impact of Monetary Supply on Chinese

Nonferrous Metal Price Movement*

Zesheng Sun and Bianxia Sun

Received 12 February 2014; accepted 19 November 2016

Employing both classical vector autoregressivemethodology and regression models

utilizing shock factors constructed with the Hodrick–Prescott filtering method, this

paper empirically studies the influence of monetary factors on the price of nonfer-

rous metals and their expectation formation in the Chinese market. Monetary fac-

tors are found to significantly positively influence Chinese nonferrous metal

prices, and further empirical research reveals that a structural change occurred near

August 2006. There is an expectation formation mechanism of lagged futures prices

on spot metal prices, and the risk originating primarily from international market is

transmitted to Chinese markets.

Keywords: Chinese market, expectation formation, monetary supply, nonferrous

metal price index.

JEL classification codes: E51, Q32, Q21.

doi: 10.1111/asej.12111

I. Introduction

Nonferrous metals (including copper and aluminum) are among the most impor-

tant commodity groups in the world in terms of production and consumption.

They are indispensable raw materials for economic development, and demand

for nonferrous metals goes hand in hand with the speed of economic growth.

During the most recent decade, China has played an increasingly important role

in the nonferrous metal market, and its market share of production (consumption)

has increased from 16.13 percent (16.86 percent) in 2002 to 42.28 percent (46.71

percent) in 2013.

1

During that same period, nonferrous metal prices first

experienced continuous and substantial rises, and then decreased dramatically

after 2006. The prices fell more rapidly during the 2008 global financial crisis

*Sun: School of Economics and Management, Zhejiang University of Science and Technology, 318

Liuhe Rd., Xihu District, Hangzhou, China. Sun (corresponding author): Department of Finance,

Southern University of Science and Technology, 1088 Xueyuan Rd., Nanshan District, Shenzhen,

China. Email: sunbx@sustc.edu.cn. Wethank two anonymous referees very much for their helpful sug-

gestions. This research is financially supported by the NSFC Research Fund (71601091), to whichwe

are really grateful.

1 Source: 2014 China Nonferrous Metals Industry Yearbook.

© 2017 East Asian Economic Association and John Wiley & Sons Australia, Ltd

Asian Economic Journal 2017, Vol.31 No. 1, 17–37 17

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(Figure 1). However, metal prices quickly rebounded and continued to increase

due to expansionary monetary policies implemented by China (Four Trillion Pol-

icy) and other major economies between 2008 and 2009, demonstrating the close

relationship between commodity prices and monetary factors.

Certain studies have indicated that monetary factors significantly affect

commodity prices (e.g. Bessler, 1984; Pindyck and Rotemberg, 1990; Ping,

1998). These studies demonstrate that the adjustments of consumption goods’

prices in response to monetary factors are slow, whereas commodities are

traded intensively in financial markets with elastic prices. Therefore, Frankel

(1986) notes that the disequilibrium in the commodities market, which is

caused by changes in monetary factors, may be adjusted by overshooting of

commodity prices in financial markets. Employing a vector autogressive

(VAR) framework, Anzuini et al. (2010) and Choi et al. (2014) offer evidence

of significant and long-lasting impacts of US monetary policies and the US

dollar exchange rate on commodity prices. Using the quarterly data of the

main OECD countries, Belke et al. (2010) report that monetary supply is a

critical factor affecting commodity prices. Different from the above studies

based on data for developed countries, for those large developing countries

with interest rate regulation as in China, further empirical evidence is needed

to understand the impact of monetary policy on commodity prices. Research

on China’s copper and aluminum markets using VAR methodology has

Figure 1 China’s Nonferrous Metal Price Movement (January 2002–June 2014).

ASIAN ECONOMIC JOURNAL 18

© 2017 East Asian Economic Association and John Wiley & Sons Australia, Ltd