Energy Market Integration in China

This paper investigates market integration in Mainland China by employing common ADF unit root test and familiar causality test using unique highest frequency energy price data sets (ten-day interval spot prices). Meanwhile the paper has estimated the rates at which relative prices converge to their long-run values and observed the flow of energy price between cities. The major findings are as follow: First of all, both common ADF unit root test and panel unit root test have shown that gasoline and diesel markets are fundamentally integrated because almost all tests reject unit root hypothesis. Taking into some special and remote cities (some western and southwestern small cities, such as Lhasa, Wulumuqi, Guiyang and Lanzhou), it may be safe to conclude that gasoline and diesel markets are fairly integrated. This finding is consistent with international literatures (Fan and Wei, 2006; Panagiotidis and Emilie, 2007). Although all tests disclose that coal and electricity markets in mainland China seem not well integrated as gasoline and diesel markets, this may be most partly due to bulk of coal and non-storability of electricity and power network disconnection. As a consequence, panel unit root tests rejected null hypothesis, which may imply that coal and electricity markets in Mainland China are still quite integrated as a whole. Second, there are not any significant intercept terms, electricity prices empirically and theoretically converge to absolute price parity due to no more transportation cost once started. However, coal and gasoline prices more likely converge to their relative price parities due partly to significant transportation cost. Third, the rates at which relative prices converge to their long-run values are very close between each relative price series within the same energy product and also fairy short compared with those internationally. Fourth, there are rich causality relationships between cities for coal and electricity. Causality not only originates from supply cities but from demand cities as well