The rapid expansion of speculative activity within Chinese domestic commodities futures markets has been driven by the increasingly risky funding structures within the banking system. The ongoing financialization of China’s economy is creating spillovers into global financial markets, sending both reflationary and deflationary signals. Corporate bond defaults are contributing to rising yields and borrowing costs, while overnight repo market turnover is weakening, potentially impacting the duration of speculative activity in several asset markets. Managing the consequences of China’s financialization and the bubbles that have resulted will occupy Chinese authorities in the coming months, and risks of policy mistakes are rising.
