Regulation, financialization and fraud in Chinese commodity markets after the Global Financial Crisis

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.

KEYWORDS:

• China
• credit bubbles
• commodities
• financialization
• Hyman Minsky
• Katherina Pistor

JEL:

• B26
• B52
• K40
• Q02

ACKNOWLEDGEMENTS

Helpful advice and comments on a previous draft of the paper were provided by Gordon Clark, Sabine Dörry, Jacob Feygin, Daniel Haberly, Karen Lai, Sarah McGill, Maria Schweinberger and Dariusz Wójcik, three anonymous reviewers, as well as the discussants and participants at workshops and conferences by the Finance, Law and Economics Working Group, the Post-Keynesian Economics Study Group, the 2016 World Interdisciplinary Network for Institutional Research (WINIR) Conference as well as at City University London. None of the above should be held responsible for the findings presented herein.

DISCLOSURE STATEMENT

No potential conflict of interest was reported by the author.

Notes

1. Interviewees included the managing director of the commodities arm of a large financial institution; the head of the energy and natural resources practice for a large accountancy firm; the director of commodities research at a European bank; the commodities reporter for a financial sector trade publication; the former head of capital markets at a large think-tank; the chief executive officer of the Singapore branch of a large European bank; the head of non-ferrous trading for a Chinese commodity trading firm; the chief financial officer for a Geneva-based commodity trading firm; and the chief executive officer of a Singaporean agricultural and soft commodities trading firm.

2. See also Zhang and Peck (2016) for a discussion of China’s added complexity to the ‘varieties of capitalism’ debates.

3. This is particularly evident in the extensive discussion in geography of the role of the Chicago Mercantile Exchange (Muellerleile, 2015).

4. For similar reasons, the legal institutionalist school also takes issue with the understanding of the role of the law in markets in the work on transaction costs and property rights by Alchian and Demsetz (1973) and Williamson’s (1985) new institutional economics, where markets operate largely exogenously to the law.

5. Figures from the World Bank Group’s ‘World Development Indicators’ (accessed March 28, 2018).

6. There are multiple types of financial activities that are part of what is considered the shadow banking system in China, including, but not limited to, trust loans, entrusted loans and acceptance drafts (see Elliott et al., 2015, for an overview).

7. Notable exceptions include econometric treatments by Roache and Rousset (2015), Xiao and Balding (2015), and Tang and Zhu (2016).

Additional information

Funding

Financial support by the Santander Foundation and St Catherine’s College University of Oxford was integral for the completion of fieldwork that informed this paper, as was the generosity of faculty and staff at the Global Production Networks Centre at the National University Singapore, which hosted me during this time.