Chinese monetary policy significantly affects global economic activity and inflation through a real transmission channel that crucially propagates via commodity prices. This column shows that the intensive use of commodities in Chinese infrastructure investment explains the strong yet delayed response of industrial metals and energy prices. A sizeable portion of inflationary spillovers to foreign countries (about 70% for advanced economies) is directly transmitted via commodity prices due to dependence on commodity imports. Financing conditions in commodity-exporting emerging economies are also greatly affected by the commodity channel of Chinese monetary policy.
Despite the rise of China as a leading global economy (Baldwin 2025), Chinese monetary policy is still a relatively underexplored subject, especially from an international perspective. Several factors hinder the enhancement of our knowledge in this field, such as the availability of high-quality Chinese official data (Fernald et al. 2021, Barcelona et al. 2022, Chen et al. 2024) and, even more crucially, the peculiar institutional monetary policy framework where the quantity of money, rather than the interest rate, was the only intermediate monetary policy tool until 2017.
In a recent paper (Ferriani and Gazzani 2025), we examine how Chinese monetary policy propagates through the global economy, taking into account the specific institutional features of its monetary framework. We find that Chinese monetary policy is propagated at the international level through the commodity channel, in line with China’s prominent role as a commodity consumer (Figure 1).
Figure 1 Share of Chinese commodity consumption over global consumption
Sources: Author’s elaboration on data from Statistical Review of Energy, World Bank, IMF, LSEG.
The macroeconomic impacts of Chinese monetary policy
We leverage vector autoregressive (VAR) models and the monetary policy shocks introduced by Chen et al. (2018, 2023) to investigate the macroeconomic impacts of Chinese monetary policy both domestically and internationally. The exogenous component of monetary policy is identified through deviations from a nonlinear Taylor rule in which the Chinese central bank determines money growth as a function of the annual GDP growth targets set by the government. The central bank responds more to a negative output gap with respect to the target than to a positive gap.
Domestically, Chinese monetary policy depresses both output and inflation and intensely affects commodity-intensive infrastructure investment. At the international level, Chinese monetary shocks influence foreign economies via a delayed real-side transmission (Figure 2), in contrast to US monetary policy which typically propagates swiftly through global financial markets. The mild and delayed response of proxies for the global financial cycle – VIX, excess bond premium (EBP), dollar index – suggests that their response arises spontaneously due to the deterioration of the economic outlook rather than being a significant transmission channel per se. A 1% contraction in M2 in China driven by exogenous monetary policy shocks leads to a decline in world industrial production reaching a trough of almost 1.5% after six quarters. The response of commodities is staggering, with a 10% fall in (real) prices over a similar period. This massive effect is likely due to the role of China as the world factory (Baldwin 2025) and with the domestic propagation of Chinese monetary policy via commodity-intensive infrastructure investment as confirmed by the response of granular commodity prices where industrial metals, raw materials, and energy inputs respond the most to Chinese monetary policy (Figure 3).
Figure 2 Global effects of Chinese monetary policy
Note: Quarterly data, sample: 2000-2018, point estimate and 68-90% confidence intervals from Proxy-SVAR identification.
Figure 3 Response of commodity prices to Chinese monetary policy shocks
Note: Quarterly data, sample: 2000-2018, point estimate and 90% confidence intervals from Proxy-SVAR identification.
The international transmission: The commodity channel
Moving to a cross-country analysis, we find that Chinese monetary policy generates sizable inflationary spillovers to the rest of the world. We rely on a counterfactual exercise to gauge the relevance of the commodities price channel in transmitting Chinese monetary policy to foreign economies. In other words, we estimate the effects on country-specific measures of inflation under the assumption that commodity prices do not respond. We first focus on the impact of the Chinese monetary policy on different measures of inflation and find that commodities play a key role in these international effects for all economies and especially for advanced countries (Table 1). The commodity channel accounts for about 70% of the effect on producer prices (see also Figure 4) and energy consumer prices and for 55% in the case of headline consumer prices.
Table 1 Relevance of the commodity price channel
The European big four – France, Germany, Italy, and Spain – are directly and heavily affected by this channel due to their high dependence on commodity imports (Figure 5). In contrast, the impact would be virtually null if the commodity channel were absent. 1 For PPI, the direct exposure of countries in terms of commodity imports relative to GDP can explain about 50% of the relevance of the commodity channel of Chinese monetary policy.
Advanced economies are not the only ones affected by Chinese monetary policy. As a second counterfactual exercise, we analyse whether the commodity channel of Chinese monetary policy matters for financing conditions in EMDEs as proxied by their Emerging Markets Bond Index (EMBI) spread, i.e. the risk premium investors demand for holding debt from EMDEs. Commodity-exporting EMDEs are heavily affected as well: the impact on commodity prices generates terms of trade fluctuations and affects the financing conditions of those countries. For instance, Chile’s EMBI spread rises (cumulatively) by about 150 basis points after a Chinese contractionary monetary policy shock. Notably, by shutting down the commodity channel (copper price), the response of EMBI spread becomes totally muted.
Figure 4 PPI spillovers from Chinese monetary policy shocks
Note: Spillovers to PPI of foreign economies (peak response over 16 quarters). Blue: commodity channel active. Orange: commodity channel shut-down. Quarterly data, sample: 2000-2018, 90% confidence intervals.
Figure 5 PPI spillovers from Chinese monetary policy shocks
Note: Correlation between the commodity channel of Chinese monetary policy and commodity exposure from abroad.
Conclusions
Our paper documents that Chinese monetary policy generates sizeable spillovers to the global economy driven by a real channel – contrary to US monetary policy that transmits mainly via a financial channel – which affects massively commodity prices. The commodity channel of Chinese monetary policy plays a key role for advanced economies, especially those more dependent on commodity imports, as well as on EMEs’ financing conditions triggered by their reliance on commodity exports. As monitoring Chinese economic development is often difficult, the response of commodity prices represents a useful tool to assess the global effects of Chinese-specific shocks.
Source : VOXeu
