Can the Shanghai LNG Price Index indicate Chinese market? An econometric investigation using price discovery theory
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RESEARCH ARTICLE
Yeli ZENG, Cong DONG, Mikael HÖÖK, Jinhua SUN, Danyang SHI
Can the Shanghai LNG Price Index indicate Chinese market? An econometric investigation using price discovery theory
© Higher Education Press 2020
Abstract China became the world’s second largest liquefied natural gas (LNG) importer in 2018 but has faced extremely high import costs due to a lack of bargaining power. Assessments of the Shanghai LNG Price Index, first released in 2015, are vital for improving the understanding of these cost dynamics. This paper, using the LNG price index data from the Shanghai Petroleum and Gas Exchange (SHPGX) coupled with domestic and international LNG prices from July 1, 2015 to December 31, 2018, estimates several econometric models to evaluate the long-term and short-term equilibriums of the Shanghai LNG Price Index, the responses to market information shocks and the leading or lagging relationships with LNG and alternative energy prices from other agencies. The results show that the LNG price index of the SHPGX has already exhibited a long-term equilibrium and short-term adjustment mechanisms to reflect the average price level and market movements, but the market information transparency and price discovery efficiency of the index are still inadequate. China’s LNG market is still relatively independent of other natural gas markets, and marketization reforms are under way in China. The influence of the SHPGX LNG price index on the trading decisions of market participants is expected to improve with further Received Jan. 20, 2020; accepted May. 14, 2020; online Oct. 20, 2020 Yeli ZENG, Danyang SHI School of Economics and Management, China University of Petroleum, Beijing 102249, China
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Cong DONG ( ) School of International Trade and Economics, University of International Business and Economics, Beijing 100029, China E-mail: [email protected] Mikael HÖÖK Department of Earth Sciences, Uppsala University, Uppsala 75105, Sweden Jinhua SUN Crude Oil Department, Petro China International Co., Ltd., Beijing 100033, China
development of China’s LNG reforms, the formation of a natural gas entry-exit system, and the increasing liquidity of the hub. Keywords liquefied natural gas, price index, Shanghai Petroleum and Gas Exchange, price discovery, market reforms
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Introduction
Within the Paris Agreement adopted at the United Nations Conference on Climate Change in 2015, China’s commitments mainly include peaking its carbon emissions by approximately 2030 and reducing its CO2 emissions per unit of GDP by 60%–65% from the 2005 level [1]. Natural gas, as the cleanest fossil fuel, has gained increasing recognition for its importance in achieving carbon emission targets and improving domestic environmental quality [2–5]. China increased its natural gas consumption from 186.9 billion m3 in 2014 to 280.3 billion m3 in 2018, while its domestic gas production increased from 130.2 to 160.3 billion m3 during the same period [6]. The rapidly expanding gap between supply and demand implies there is a great increase in natural
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