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Regulation, financialization and fraud in Chinese commodity markets after the Global Financial Crisis
Regional Studies
Abstract
The Chinese government’s 2008 fiscal stimulus resulted in a surge of liquidity flowing into the country’s shadow banking system. The paper focuses on two financing channels: the Fanya Metal Exchange and the commodity collateral financing market, which are paradigmatic for the unintended consequences of this credit bubble. The opacity of these markets and the assumption that asset prices would rise indefinitely incentivized widespread fraud that eventually impacted global metals markets and roiled China’s economy. These two cases elucidate the complexity of China’s financialized commodity markets, the spatially variegated consequences of credit bubbles and the fragile foundations of China’s post-2008 growth.
... There are other topics for future research highlighted by papers in this special issue. The papers by Chen (2019, in this issue), (Choi, 2018, in this issue) and Engel (2019, in this issue) demonstrate the processes of financialization operating at different scales, from urban air rights, through commodity markets to the whole national economy (South Korea). But how do these processes relate to each other empirically and conceptually? ...
This special issue examines the recent trends and impacts of financial development in Asia and its implications for regional studies in this rapidly growing region. This editorial introduces the dynamics of the financial landscape in Asia and its growing influence in global finance. Overall, the papers in this special issue highlight the important roles of both the local institutional contexts and global capital markets in shaping new financial geographies in Asia. The conclusion offers some critical reflection on ‘Asia’ as a working category in examining financial networks and practices, and identifies some key research strands for understanding future financial development in Asia.
Purpose
This paper aims to investigate whether the establishment of commodity futures can effectively hedge systemic risk in the spot network, given the context of financialization in the commodity futures market.
Design/methodology/approach
Utilizing industry association data from the Chinese commodity market, the authors identify systemically important commodities based on their importance in the production process using multiple graph analysis methods. Then the authors analyze the effect of listing futures on the systemic risk in the spot market with the staggered difference-in-differences (DID) method.
Findings
The findings suggest that futures contracts help reduce systemic risks in the underlying spot network. Systemic risk for a commodity will decrease by approximately 5.7% with the introduction of each corresponding futures contract, since the hedging function of futures reduces the timing behavior of firms in the spot market. Establishing futures contracts for upstream commodities lowers systemic risks for downstream commodities. Energy commodities, such as crude oil and coal, have higher systemic importance, with the energy sector dominating systemic importance, while some chemical commodities also have considerable systemic importance. Meanwhile, the shortest transmission path for risk propagation is composed of the energy industry, chemical industry, agriculture/metal industry and final products.
Originality/value
The paper provides the following policy insights: (1) The role of futures contracts is still positive, and future contracts should be established upstream and at more systemically important nodes in the spot production chain. (2) More attention should be paid to the chemical industry chain, as some chemical commodities are systemically important but do not have corresponding futures contracts. (3) The risk source of the commodity spot market network is the energy industry, and therefore, energy-related commodities should continue to be closely monitored.
To ensure the safety and soundness of the global financial system as well as individ- ual financial institutions and to reduce systemic risk, numerous policy measures and regulatory reforms have been brought forward as a reaction to the Global Financial Crisis and the European Sovereign Debt Crisis. Simultaneously, numerous academic works have critically reviewed these developments. Therefore, based on a dataset of 455 papers, this article intends to structure the multitude of publications and provide a comprehensive overview of post-crisis regulatory research publications. Studies can be roughly divided into three overarching clusters: publications identifying causes of the crisis, articles focusing on policy and reform reactions, and literature investigating whether these reforms fit their purpose. A holistic and systematic review allows us to extract relevant recommendations and areas of action to be taken to prevent such a crisis in the future.
The present study explores to what extent policy insecurity and the changes in the US legal financial infrastructure have affected commodity price volatility. In addition to macroeconomic‐fundamentals, the study introduces two “psychological” factors proxied by the economic policy uncertainty index and the perception of price risk within specific commodity markets, plus an institutional (de)regulatory factor constructed as a dichotomous variable. The latter mirrors the period of financial deregulation experienced under the Commodity‐Futures Modernization Act and the period of regulation registered under the Dodd‐Frank Act. The results reveal that price volatility is a complex phenomenon generated by the joint effect of a plethora of drivers. Both economic policy uncertainty and highly deregulated financial markets exert an influence on price dynamics and produce higher price volatility. Similarly, higher market risk perception leads to higher price fluctuations. Exchange rate, financial wealth and crude oil further explain price rises and falls. The study indicates that government decisions influence commodity markets and a financial system grounded on a sound legal basis is essential for its orderly functioning. A transparent financial structure should be able to generate checks and balances for the market, spawn vibrant policies and prevent the negative consequences of intense price volatility.
Despite an attractive interest rate differential between China and foreign countries, existing capital control might prevent currency carry trade strategies to be executed. We focus on the copper market to study if trades are taken in order to execute carry trade strategies. We find that copper value is related to carry trade through the onshore-offshore interest differential, while the pegged nature of the USD/CNY exchange rate makes traders indifferent to the forward risk premium. We rule out the possibility of high average payoff due to peso problems, because risk factors are insignificant, implying that carry traders are either fully hedged on FX risks, or they are unconcerned about FX risks.
Using a panel of Chinese firms over the period 2003-2013, we show that, from the supply-side perspective, as a result of the implementation of the economic stimulus package in China, state-owned enterprises (SOEs) received more bank loans and invested more than non-SOEs. We further find that after the implementation of the economic stimulus package, bank lending became less responsive to firm profitability, and firm investments became less responsive to investment opportunities for SOEs, non-SOEs from favoured industries and regions, and non-SOEs with political connections. Overall, our findings support the view that the stimulus package and the associated increase in bank loan supply in China resulted in more resources being allocated to SOEs.
Yeung G., He C. and Zhang P. Rural banking in China: geographically accessible but still financially excluded? Regional Studies. Based on the distribution patterns of rural credit cooperatives in about 2200 counties in 2009, this paper examines two aspects of financial exclusion in rural China after the restructuring of the banking industry. Despite the state's efforts to ensure financial inclusion in rural areas, poor farmers could be spatially included while still being denied loans due to their inability to provide collateral, and the lack of formal credit records. The mismatch between the supply and demand of credit has led to informal loans substituting for formal loans and thus contributed to the proliferation of informal banking in China.
The high GDP growth rate in China has been falling considerably since 2011 and has never got back to the previous amazing double digit number thereafter. Being accompanied by a series of worrisome signs, including booming housing prices and increasing local government debt risk, this situation leads to some pessimistic views concerning the approaching of China’s “Minsky Moment”. However, disagreeing voices exist as well. This paper attempts to assess this controversy from applying Minsky theory. We argue that the heavy debt of local governments may be the main cause for provoking financial fragilities and dragging China into the “Minsky Moment”. We also examine the reasons, size and structure of local governments’ debt, and offer policy recommendations. While Minsky himself and his followers often focus on merely the microeconomic units of banks or firms, we extend the analysis to all the economic sectors including households, firms, foreign sectors, financial institute and government. Both Minsky’s original threefold and Vercelli (2011)’s sixfold taxonomies are applied with empirical data collected from China’s official sources. The calculated results of liquidity ratio and solvency ratio for each economic sector demonstrate that financial institute can be seen as speculative borrowers, while both households and central government are hedge borrowers. However, local governments are in heavy debt. Theoretically, this situation would provoke financial fragility in China, for example, via increasing the non-performing loans. Data analysis indicates that China was not immune to the global financial crisis though it has been less affected from the worldwide recession. In other words, it was nearly in a “Minsky Moment”, while the timely policy adjustment rescued the economy from collapse. Although local government debt situation is now under control and the policy adjustment is on the right track when several local governments are allowed to issue their own bonds, the Chinese economy may still face a risk of approaching the “Minsky Moment”. Additionally, the problems provoked by this trail policy are asking for an urgent need for a fiscal system reform. We thus suggest that more attention should be paid to improving and reforming Chinese fiscal system, particularly to the reforms of the fiscal relationship between central and local governments, the legal framework for local government debt management, expansion of channels for local revenues and readjustments of the tax system.
Zhang J. and Peck J. Variegated capitalism, Chinese style: regional models, multi-scalar constructions, Regional Studies. The paper explores tensions between the varieties of capitalism framework and the heterogeneous particularities of the Chinese case. Rather than forcing the Chinese model into analytical boxes derived, primarily, from analyses of European and North American capitalism, this complex formation more appropriately can be understood to exist in a ‘triangular’ relationship with the two conventional poles of varieties scholarship, the US-style ‘liberal market’ economy and the German-style ‘coordinated market’ economy. Furthermore, the substantial degree of internal (regional) heterogeneity evident in the Chinese case calls into question those models of capitalism that focus narrowly on institutional coherence at the national scale. Illustrating this point, a range of ‘sub-models’ of Chinese capitalism is examined: regional styles of capitalist development that remain distinct from one another, and deeply networked into a range of global production networks, and ‘offshore’ economies, just as they remain, to some degree, distinctively Chinese.
Abstract The paper develops a sympathetic critique ofthe concept of financialization. This concept has been developed to account for the empowering,of financial markets and their influence over the unfolding of economy, polity and society. Processes of financializationare claimed to manifest at a number of scales, ranging from higher levels of instability within the economy as a whole, through pressure exerted on corporations by capital markets, to the equity effects of the financial system on individuals and households.. In seeking to explain the change within contemporary society financializationhas to date been relatively underplayed, particularly when compared to similar and related concepts such as neoliberalization.While the concept of financializationhas the potential to unite researchers across cognate social science fields,
This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common law countries generally have the best, and French civil law countries the worst, legal protections of investors, with German and Scandinavian civil law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.
This paper argues that firm finance is something of a 'black-box' in economic geography, a largely take-for-granted aspect of production. Focusing on small firms, the paper argues that firm finance warrants analysis, not simply to 'add' to knowledge and to form another sub-discipline of economic geography, but in order to further develop and refine our understanding of uneven development. The paper explores the neglect of firm finance in economic geography and highlights some of the contributions of literatures in eco-nomics and business. Finally, the paper outlines three points of intersection between these disparate, usually disciplinary-bound, literatures in business, economics, and economic geography: the place-bound nature of firms, the social character of economic relations, and third, the power relations and asymmetries inherent in financial relationships. These intersections are used to critique existing small firm finance literatures and to outline the contours of an emerging research agenda in economic geography. Copyright 2003, Oxford University Press.
This chapter explores geographical approaches to financial systems, with special attention to their instability. After examining the foundational contributions that launched the geography of finance, the chapter summarizes spatial research on the global spread of innovative practices in finance. It then asks why so little attention was paid to macro-aspects of financial crises prior to September 2008. A review of geographers' research of sub-prime lending and crisis finds that this work, extensive as it is in analyzing the microfoundational aspects of sub-prime lending and securitization, pays no attention to the macro-dimension of financial instability. This lacuna is shared with mainstream macroeconomics, which famously failed to see the sub-prime crisis coming. The chapter then explores economist Hyman Minsky's macro-approach to financial instability and crisis. The chapter concludes by arguing that developing a spatial analysis of financial instability should be a high priority for the emerging geography of finance.
We propose and test a theory of using commodities as collateral for financing. Under capital control and collateral constraint, investors import commodities and pledge them as collateral to earn higher expected returns. Higher collateral demands increase commodity prices and make the inventory–convenience yield relation less negative. Our model illustrates these equilibrium effects and suggests that the violation of covered interest-rate parity is a proxy for collateral demands. Evidence from eight commodities in China and developed markets supports the theoretical predictions. Our findings complement the theory of storage and provide new insights into the financialization of commodity markets.
Received July 16, 2015; accepted April 7, 2016 by Editor Stefan Nagel.
[I]t is, however, decisive for a realistic understanding of the phenomen [sic] of the state to recognize the importance of that group of persons in whom it assumes social form, and of those factors which gain domination over it. This explains the state’s real power and the way in which it is used and developed.1
One of the deepest conceptual structures of the modern mind and discourse, in the sense of Michel Foucault, is the distinction between the ‘economy’ and the ‘polity’. It is a distinction that roughly parallels that between ‘private’ and ‘public’. These distinctions have increasingly predominated thought and discourse since the Enlightenment, since the political theories of Hobbes, Locke, Pufendorf and Montesquieu, and since the economic theories of Smith and, yes, Marx. Political economic thought of Western civilisation is imbued with the concepts, ‘economy’ and ‘polity’, ‘private’ and ‘public’. Except for ‘religion’ and the ‘nuclear family’, it is difficult if not impossible to identify other such fundamental conceptions that underlie vast reaches of thought. The predominant perception is that the concepts constituting each pair are fundamentally separate and distinct, self-subsistent vis-à-vis each other and in conflict. In ordinary life, we share the fundamental belief that government and the economy are separate and mutually exclusive, a belief reinforced by language and ideology.
This article first examines the composition of the shadow banking system in China and then critically analyses its interconnectivity with the traditional banking system and global capital markets. It argues that whilst shadow bank lending in China contributes to the country's economic growth, the normal functionality of capital markets could be impaired if shadow banks continue to operate on a high-risk/high-yield business model which could potentially pose a systemic risk. It also addresses the concerns arising from high-leverage shadow bank lending practice and cautions against shadow banks operating in a black hole area that enables them to escape from regulatory purview. The article suggests that future regulatory (law) reform should guide shadow banks towards consumer protection by establishing an effective internal control system, enabling sufficient risk controls and requiring material information disclosure; towards safeguarding capital markets; and towards reducing their high levels of leverage.
‘Re-balancing China’ addresses three key sets of issues in China's political economy. Part One provides an analysis of the profound effect of the global financial crisis upon China's economy, as well as the positive impact of the massive rescue package that was implemented in response to the crisis. Part Two focuses on the challenge of globalization for China's industrial policy. After more than two decades of industrial policy, China still has a negligible number of large firms that are competitive in global markets. China's experience presents a fundamental challenge to traditional concepts of industrial policy and development. Part Three examines China's international relations - in particular, its relationship with the US and the interactions between the two countries in the East and South China Seas.
This paper considers the history of governance and speculation on US derivative markets from their emergence in the middle of the 19th century through their incursion into finance in the late 20th century. It explores the importance of derivatives’ extended ancestry in agricultural markets before analyzing their entanglement with financial markets, which came much later in the 1970s and 1980s. The paper is particularly concerned with the institutional inheritance of a set of legal–regulatory boundaries that prioritized price making and the speculative trading that was necessary to produce a consistent flow of prices. This governance system for derivatives is set in contrast with the governance of securities markets, which during the 1930s became subject to more strict government oversight, particularly with regard to speculative trading. The legal boundaries between these two markets began to deteriorate in the 1970s when the Chicago derivative exchanges applied the speculative logic of agricultural derivative markets to financial instruments. The implications of this are twofold. First the paper argues that market mechanisms and market regulation are analytically inseparable, and ought to be studied as such. Second, employing this approach, the paper argues that US financial derivative markets are originally ‘derivative’ not of New York and the finance sector, but of Chicago and the agricultural sector.
Almost twenty years after economists Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer and Robert Vishny published their groundbreaking and controversial research examining the relationship between investor protection laws and stock market development, our understanding of the relationship between law and finance is still in its theoretical infancy. Today, few would argue that strong laws do not help generate credible commitments, thereby promoting financial development. Ultimately, however, this observation is little more than a useful starting point for exploring the complex, dynamic, and structurally interdependent relationship between law and finance within modern financial markets. So where might we turn for further insights into this important relationship? One potentially useful framework is the ‘Legal Theory of Finance’ (LTF). At the heart of LTF are four interwoven propositions. These propositions emphasize the legal construction of financial markets, their essential hybridity and inherent hierarchy, and the role of the law as not only a mechanism for generating credible commitments, but also a potential source of financial instability. LTF thus both compliments and expands upon conventional frameworks for understanding the relationship between law and finance.This paper uses LTF to explore the emergence, growth, and risks residing within a little known but increasingly important segment of the Chinese shadow banking system: the $USD2 trillion dollar market for wealth management products (WMPs). WMPs possess a number of distinctive legal and economic features. First, despite being marketed by banks and other intermediaries as substitutes for conventional deposits, the liabilities generated by the majority of these products do not reside on bank balance sheets. Second, while WMPs typically lock-in investors’ capital for relatively short periods of time, this capital is often invested into less liquid, longer-term assets. The resulting maturity and liquidity mismatches thus recreate the fragile capital structure of banks. Third, WMPs have emerged largely in response to China’s interventionist approach toward both banking regulation and broader macroeconomic policy. LTF holds out a number of important insights into the emergence of WMPs, their legal structure, their dramatic growth in the wake of the financial crisis, and the risks they pose to financial stability. More broadly, examining WMPs through the lens of LTF highlights the fact that – far from simply representing the ‘rules of the game’ – the law is also often the board, the game pieces, and the dice.
It is high time we rediscovered the role of the financial cycle in macroeconomics. In the environment that has prevailed for at least three decades now, it is not possible to understand business fluctuations and the corresponding analytical and policy challenges without understanding the financial cycle. This calls for a rethink of modelling strategies and for significant adjustments to macroeconomic policies. This essay highlights the stylised empirical features of the financial cycle, conjectures as to what it may take to model it satisfactorily, and considers its policy implications. In the discussion of policy, the essay pays special attention to the bust phase, which is less well explored and raises much more controversial issues.
This study is based on the belief that economic organization is shaped by transaction cost economizing decisions. It sets out the basic principles of transaction cost economics, applies the basic arguments to economic institutions, and develops public policy implications. Any issue that arises, or can be recast as a matter of contracting, is usefully examined in terms of transaction costs. Transaction cost economics maintains that governance of contractual relations is mainly achieved through institutions of private ordering instead of legal centralism. This approach is based on behavioral assumptions of bounded rationalism and opportunism, which reflect actual human nature. These assumptions underlie the problem of economic organization: to create contract and governance structures that economize on bounded rationality while safeguarding transactions against the hazards of opportunism. The book first summarizes the transaction cost economics approach to the study of economic organization. It develops the underlying behavioral assumptions and the types of transactions; alternative approaches to the world of contracts are presented. Assuming that firms are best regarded as a governance structure, a comparative institutional approach to the governance of contractual relations is set out. The evidence, theory, and policy of vertical integration are discussed, on the basis that the decision to integrate is paradigmatic to transaction cost analysis. The incentives and bureaucratic limits of internal organization are presented, including the dilemma of why a large firm can't do everything a collection of small firms can do. The economics of organization in presented in terms of transaction costs, showing that hierarchy also serves efficiency and permits a variety of predictions about the organization of work. Efficient labor organization is explored; on the assumption that an authority relation prevails between workers and managers, what governance structure supports will be made in response to various types of job attributes are discussed, and implications for union organization are developed. Considering antitrust ramifications of transaction cost economics, the book summarizes transaction cost issues that arise in the context of contracting, merger, and strategic behavior, and challenges earlier antitrust preoccupation with monopoly. (TNM)
Economics textbooks invariably describe the important economic choices that all societies must make by the following three questions: What goods are to be produced? How are these goods to be produced? Who is to get what is produced? This way of stating social choice problems is misleading. Economic organizations necessarily do resolve these issues in one fashion or another, but even the most centralized societies do not and cannot specify the answer to these questions in advance and in detail. It is more useful and nearer to the truth to view a social system as relying on techniques, rules, or customs to resolve conflicts that arise in the use of scarce resources rather than imagining that societies specify the particular uses to which resources will be put.
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