The ‘Necessary Evil’ in Chinese Commodity Markets

Abstract

Enormous capital inflows into the emerging commodity futures markets in China raised concerns about the impact of speculation. Using a broad sample of 30 commodities across sectors, this paper investigates whether the increased presence of speculators in recent years destabilizes the commodities market in China. In a portfolio framework, we find that increased speculation does not give rise to higher volatilities, elevate the cross-market correlations, nor distort the market’s association with economic fundamentals. Consistent with the literature, long-short speculators contribute positively to the price discovery by reducing the broad market volatility and cross-correlation with stocks. Overall, the cross-speculative pressure remains relatively low, and the increased speculation does not cause seemingly unrelated commodities to become correlated.