China’s impact on global commodity returns: A time-varying perspective

Abstract

Using a time-varying parameter vector autoregressive model and a monthly data sample from October 2006 to November 2023, we examine the time-varying effects of shocks to economic activity, interest rate, and the real effective exchange rate (REER) in China on the global commodity returns. The results reveal three relevant findings. First, China’s economic activity shocks induce positive, time-varying responses from global commodity returns, and these effects have diminished significantly since 2015. Significant heterogeneity occurs in commodity subindices’ reactions. Second, interest rate shocks have a negative but limited impact on global commodity returns. Third, China’s REER shocks negatively affect global commodity returns but the intensity dampens slightly over time. Based on these findings, we recommend that China’s policymakers implement precautionary measures to mitigate the negative impacts of commodity price shocks and financial markets reforms to boost China’s influence on global commodity markets.