China s gasoline prices are still regulated by government although China's refined

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1 Relaton between Chna s gasolne prces and nternatonal crude ol prces Chaoqng Yuan a,b, Ynge Yang b, Sfeng Lu a,c, Zhgeng Fang a,c a College of Economcs and Management, Nanng Unversty of Aeronautcs and Astronautcs, Nanng, , Chna b Center for Computatonal Intellgence, De Montfort Unversty, Lecester, LE1 9BH, UK c Research Center for Scentfc Development, Nanng Unversty of Aeronautcs and Astronautcs, Nanng, , Chna Correspondng Author: Chaoqng Yuan, College of Economcs and Management, Nanng Unversty of Aeronautcs and Astronautcs, 150 Malbox, Jangnng Dstrct, Nanng, Chna,210016; Telephone: ; Emal:yuanchaoqng@126.com; Abstract Chna s gasolne prces are stll regulated by government although Chna's refned ol prcng mechansm has been reformed for many tmes. In ths paper, proxmty and smlarty between Chna s gasolne prces and Brent crude ol prces are calculated n the dfferent stages wth Chna s refned ol prcng mechansm reformng, by usng daly data and grey relatonal analyss method. The results show that there have undergone great changes of the smlarty and proxmty between Chna s gasolne prces and nternatonal crude ol prces. Keywords: Gasolne prce; Smlarty; Proxmty; Grey Relaton; Regulaton 1. Introducton The last decade wtnessed the contnuous reform of Chna s refned ol prcng mechansm although Chna s gasolne prces are stll regulated by the government. Before 1998, Chnese Gasolne prces were relatvely low; and the prces were decded by the government and adusted after a long tme. In 1998, wth the reorganzaton of Chna Natonal Petroleum Corporaton (CNPC) and Snopec, came the market-orented reforms of Chna s refned ol prcng mechansm. On June 3, 1998, the former State Plannng Commsson ssued "the reform program of crude ol and refned ol prces", provdng that the government referental prce for gasolne and desel ol would be mplemented, whle CNPC and Snopec can determne the retal prces wth an ncrease 1

2 or a decrease of less than 5%. In June 2000, the lnkage between Chna s domestc refned ol prce adustment and nternatonal market prce changes was establshed, but only Sngapore gasolne prces were selected as reference at that tme. In November 2001, Chna s refned ol prces would be adusted accordng to the changes of Sngapore, Rotterdam and New York gasolne prces: when these ol prces fluctuated n the range of 5%-8%, Chna s gasolne would be kept unchanged; f they changed over ths range, the Natonal Development and Reform Commsson would adust the benchmark prces of Chna s gasolne. On March 26, 2006, the Natonal Development and Reform Commsson adusted the refned ol prcng mechansm, and Chna s gasolne prces were lnked to nternatonal crude ol prces because ex-factory prces were ncluded. The government would set benchmark prces for the domestc refned ol. As for the retal prces, based on ex-factory prces and wth the correspondng costs, companes are allowed to determne the retal prces wth an ncrease or a decrease wthn 8%. On January 1, 2009, "refned ol prce tax reform program" was mplemented. The nternatonal crude ol prces, domestc average processng costs, taxes, and a reasonable proft were taken nto consderaton n the gasolne prces. And the gasolne consumpton tax rose from 0.2 RMB per lter to 1 RMB per lter, and desel ol consumpton tax rose from 0.1 RMB per lter to 0.8 RMB per lter. And the retalers ust could determne the gasolne or desel retal prces wth only an addtonal adustment of no more than 4%. On May 7, 2009, The "ol prce control measures" released by the Natonal Development and Reform Commsson, determned that when the prce ncrease or decrease of nternatonal crude ol was more than 4% for contnuous 22 workdays, the domestc refned ol prces could be adusted. When the nternatonal crude ol prces were below U.S. dollars 80 per barrel, the refned ol 2

3 prces would be calculated accordng to the normal processng margns. When above U.S. dollars 80 per barrel, the refned ol prces would be calculated by reducng processng margns untl wth a zero proft. When above U.S. dollars 130 per barrel, approprate fscal polces should be taken to ensure the producton and supply of refned ol n order to mantan or ncrease less gasolne and desel ol prces. On March 27, 2013, the Natonal Development and Reform Commsson adusted the refned ol prcng mechansm agan. Under the reformed refned ol prcng mechansm, the adustment perod s 10 workdays; adustment would be started up when the anchored ol s fluctuaton reaches 50 RMB per ton n contnuous 10 workdays. After Chna s refned ol prcng mechansm reformed, the government sets the benchmark prces not the detaled retal prces; chna s refned ol prces can be adusted more frequently wth a shorter adustment perod; and now chna s refned ol prces drectly lnk to nternatonal crude ol prces. At the same tme, the nternatonal ol prces ncreased dramatcally. In 2003, the Brent crude ol prces were about 30 U.S. dollars per barrel, whle n 2013 the prces are more than 100 U.S. dollars. Wth the soarng nternatonal ol prces, Chna's domestc gasolne prces have been ncreasng fast. In ths case, t s dffcult to dstngush whether t s a change n prcng mechansm or the rsng nternatonal ol prces that has led to the rsng of Chna's gasolne prces. What s more, the noton that domestc gasolne prces react quckly and more to nternatonal crude ol prce ncreases whle slowly and less to nternatonal crude ol prce reductons s largely accepted among consumers, although Chna s refned ol prcng mechansm mples that chna s gasolne prces are hghly related to nternatonal crude ol prces. And the relaton between Chna s gasolne prces and nternatonal crude ol prces reflects the gasolne 3

4 prce management ablty of the relevant government departments. The relaton also can provde some bass for the government to reform Chna s refned ol prcng mechansm and to set the gasolne prces. In addton, crude ol s the most mportant cost of refnng enterprses. If the changes of Chna s gasolne prces and those of nternatonal crude ol prces are consstent, the refnng enterprses can pass the rsk of fluctuatons n crude ol prces to the vendors and the consumers; otherwse, the refnng enterprses should bear the rsk whch can brng them ncome or loss. The relaton between Chna s gasolne prces and nternatonal crude ol prces s very mportant for the refnng enterprses to control the rsk. Thus, the relaton between Chna s Gasolne prces and nternatonal crude ol prces s very valuable to be studed. The asymmetrc mpact of nternatonal crude ol prces on refned ol prces, namely the dfferent response to prce ncreases and decreases, have long been caught attenton. Such studes began wth the UK market. And asymmetry n UK market s found (Bacon, 1991; Mannng,1991; Relly and Wtt, 1998; Galeott et al, 2003; Margherta Grasso, 2007). More studes about the US ol prce asymmetry have been made. Some of them ddn t fnd asymmetry n US market (Karrenbrock, 1991; Shn,1994; Balke et al., 1998; Bachmeer and Grffn, 2003 ), whle the others fnd that (Duffy-Deno, 1996; Borensten et al.,1997; Johnson,2002; Kaufmann and Laskowsk, 2005 ). There are also studes about some other countres such as Canada, Phlppne, Chna and so on. And some of them ddn t fnd evdence of asymmetrc prcng behavor (Godby et al.,2000;) whle the others dd (Salas,2002; Bn Tong et al., 2013; LI Zhguo and GUO Jnggang, 2013). As for ol prces asymmetry, conclusons vary wdely wth dfferent countres or markets, research methods and sets of data. Countres lke US, the UK are mostly studed. And tme seres analyss such as co-ntegraton and 4

5 ECM are appled. Monthly data, weekly data and daly data are all used. And these studes have manly focused on the reacton tme of gasolne prce changes rather than on the fluctuaton ranges of prce changes, that s gasolne prces react quckly or slowly to crude ol prces. 2. Method and Materal 2.1 Method Dfferent from the US, UK and other countres, Chna's refned ol prces are not entrely determned by the market and stll regulated by government, although Chna's refned ol prcng mechansm has been reformed for several tmes. The government s regulaton wll destroy the random or stochastc dstrbuton rules of the data whch were strctly requred by tme seres analyss. For example, even wth the latest Chna s refned ol prcng mechansm, the anchored ol prces are requred to meet rsng or declnng 50 RMB per ton n 10 sequental workdays before an adustment of Chna s gasolne prces. In most cases, when nternatonal ol prces change, Chna s gasolne prces reman unchanged. In such cases, t may be hard to reveal the true relatonshp between the Chna s gasolne prces and nternatonal crude ol prces wth tme seres analyss. And t s proved by the results of the unt root tests. Year s dvded nto fve stages accordng to the reform of Chna s refned ol prcng mechansm mentoned n secton 1, as shown n table 1. In all the perods, the varables, ncludng nternatonal ol prces and Chna s gasolne prces, wll be tested for statonarty by ADF tests and PP tests. The results of these tests are shown n Table 1, n levels and after one dfferentaton (prefxed by ). It s shown that nternatonal crude ol prces and Chna s gasolne prces are co-ntegrated n the 2 nd and 4 th perod, whle not co-ntegrated n the 1 st, 3 rd, and 5 th perod. 5

6 Perod 1 st : nd : rd : th : th : Table 1 ADF and PP tests for statonary of the Varables Methods Varables ADF PP t-statstc Prob t-statstc Prob COP b b GP GP a a COP COP a a GP GP a a COP b b GP GP a a COP COP a a GP GP a a COP c c GP GP a a Note:COP means Crude Ol Prce; GP means Gasolne Prce; one dfferentaton s prefxed by. adenotes sgnfcance at the 1% level. bdenotes sgnfcance at the 5% level. c Denotes sgnfcance at the 10% level. And Chna's refned ol prcng mechansm s not transparent, because t only sets the prce adustment condtons, but how to adust s not specfed. Ths means that Chna's refned ol prcng has strong grey characterstcs. The grey ncdence models based on smlarty and nearness provde a workable soluton for studyng the relatonshp between Chna s gasolne prces and nternatonal crude ol prces, whch nclude the smltude degree of grey relaton model and the close degree of grey relaton model. The smltude degree of grey relaton model s used to measure the smlar degree of geometry between sequence and sequence ; the close degree of grey relaton model s used to measure the close degree n space between sequence 6

7 and sequence (Lu S. F. et al, 2011). And the grey ncdence models based on smlarty and nearness can reflect the relaton of fluctuaton ranges between sequences, not measure tme response of the sequence (tme seres), because of the bass on shapes of the sequences. The close degree of grey relaton model of and, s defned as below: 1 (1) 1 S S below: And the smltude degree of grey relaton model of and, s defned as 1 (2) 1 s s Where S, S s, s, s s, S S were defned respectvely (Lu S. F. et al, 2011). However equaton (1) and equaton (2) gnore the real background of the study ssue, whch wll lead to the falure of reflectng the relaton between two varables changes n some cases. For example, when t comes to heght comparson, t s a very common phenomenon that adult heghts vary 5 cm; but for three year old chldren, 5 cm dfference n heght s a very bg gap. So the real background of study ssue should be reflected n the equatons. And the models should be mproved further as follows. Defnton 1 Assume sequence and sequence have the same length, then call 2 S S 1 (3) S S the proxmty of and. Defnton 2 Assume sequence and sequence have the same length, then call 7

8 2 s s 1 (4) s s the smlarty of and. In equaton (3) and equaton (4), S S and s s represent the dfference between system behavor sequences; whle S S s s represent the real background of study ssue. Correspondngly, the proxmty of and reflects the closeness of the two sequences, and the smlarty of of the two sequences. 2.2 Data and reflects the smlarty Chna s gasolne retal prces are not avalable because of lack of authorzed nvestgaton. So the ex-factory prce of No. 93 gasolne s used because No. 93 gasolne s most consumed n Chna. Accordng to the Natonal Development and Reform Commsson's rened ol prce adustment notce, related materals from the ol companes and some news reports, the Chna s gasolne prces sequences are obtaned. Overall, there are cumulatve 48 adustments from January 1, 2003 to September 12, n recent years, the adustment frequency s relatvely hgh. Before calculaton, the Brent crude ol prces are converted nto those of RMB per lter. And then, Chna s gasolne prces have same meanng, unt and magntude wth Brent crude ol prces. The sequences of Chna s gasolne prce and Brent crude ol prce can be used to calculate smlarty and proxmty. Excludng holdays wthout prce or exchange rate data, a total of 2617 vald data s obtaned, as shown n Fg. 1. Fg. 1 shows that the relatons between the Chna s gasolne prces and Brent crude ol prces are not the same n the dfferent perods. 8

9 Brent Chna's Ol prce 3. Results and Dscusson Fg. 1 Chna s gasolne prces and Brent crude ol prces from 2003 to 2013 Takng calculaton method smlar to that Lu S.F. et al. (2011) proposed, S, S, S S, s, s,and s s are computed, then smlarty and proxmty of Chna s gasolne prces and Brent crude ol prces n the fve stages are calculated accordng to Equaton (3) and Equaton (4), as shown n table 2: Table 2 The proxmty and smlarty of Chna s gasolne prce and Brent crude ol prce n dfferent perods Perod Smlarty Sgn of s s Proxmty a a a a the proxmty excludng the nfluence of gasolne consumpton tax In the frst two stages, the Brent crude ol prces and Chna a gasolne prces both rose, and s s <0, ndcatng that the ncrease of Chna s gasolne prces s less than that of Brent crude ol prces. The smlarty n the frst stage s , ndcatng that 9

10 the ncrease of Chna s gasolne prces s rather less than that of Brent crude ol prces n the frst stage. The smlarty n the second stage s , almost equal to 1. Although Chna s gasolne prces grew stably n ths perod, wth the Brent crude ol prces shockng, ther overall changes are very close. In the thrd stage, there s a declnng trend n Brent crude ol prces, and s s >0, ndcatng that the declne of Chna s gasolne prces s less than that Brent crude ol prces. In fact, the Brent crude ol prces declned n ths stage whle the Chna s gasolne prces even rose slghtly, whch leads to a small smlarty of them, In the last two stages, Brent crude ol prces have shown a rsng trend, and s s >0 ndcatng that the ncrease of Chna s gasolne prces s more than that of Brent crude ol prces. In the ffth stage, the smlarty s , a lttle bt larger than n the fourth stage, whch means that n the ffth stage Chna s gasolne prces changed more consstently wth Brent crude ol than the fourth stage. If smlarty degree s less than 1, t ndcates that the changes of Chna s gasolne prces and Brent crude ol prces are nconsstent, whch wll certanly change the proxmty. In the frst two stages, the Brent crude ol prces rose, whle the smlar degree s less than 1 and s s <0, whch narrows down the gap between them and ntensfes the proxmty. But after 2009, the smlarty actually shows that when nternatonal ol prces declned, there was only a small declne n Chna s gasolne ol prces, and when nternatonal ol prces rose, there was a larger rsng n Chna s gasolne prces, whch caused a sgnfcant declne n the proxmty of Chna s gasolne prces and Brent crude ol prces. From these results, some mportant fndngs are obtaned as follows: 10

11 Frst, the Brent crude ol prces change accordng to the nternatonal market stuaton, whle Chna s gasolne prces change under the regulaton of the government. So the changes between them are nconsstent, whch causes the dfferent smlarty and proxmty of Brent crude ol prces and Chna s gasolne prces n the dfferent perods. Second, the relaton between Chna s gasolne prces and Brent crude ol prces are nfluenced by Chna s refned ol prcng mechansm. Before 2009, Chna's gasolne prces rased less than the Brent crude ol prces; But after 2009, ths stuaton was reversed. As a result, even excludng the nfluence of refned ol consumpton tax, the proxmty between the Chna s gasolne prces and the Brent crude ol prces has been greatly reduced. Chnese consumers perceptons to the Chna s refned ol prces ndeed reflect the nconsstency between Chna s gasolne prces changes and nternatonal crude ol prces changes. Thrd, the smlarty and proxmty of Brent crude ol prces and Chna s gasolne prces vary, ndcatng that refnng enterprses have to bear not only the prce fluctuaton rsk of nternatonal crude ol but also the polcy rsk. Forth, the government can set gasolne prces so well that changes of Chna s gasolne prces and those of nternatonal crude ol prces are very consstent sometmes, for example, the smlarty n the second stage s But more often, the government can not do t well. 4. Conclusons In general, ths paper studed the relaton between Chna s gasolne prces and nternatonal crude ol prces. The contrbutons of the paper nclude: frst, Chna s refned ol prcng mechansm reform s summarzed; Second, grey relatonal analyss, a new method, s ntroduced to study the relaton between gasolne prces and crude ol 11

12 prces when tme seres analyss s not applcable because of the government s regulaton; thrd, the relaton between Chna s gasolne prces and nternatonal crude ol prces are analyzed. Through the smlarty and proxmty calculated n secton 3, the relaton between Chna s gasolne prces and Brent crude ol prces has been revealed. Overall, the relaton s nconsstency, whch s not entrely unreasonable. In the early perods, the Chna s gasolne prces were lower than the Brent crude ol prces sometmes, whch s clearly unreasonable and not normal. In ths stuaton the government actually suppled refned ol subsdes. However, almost all countres n the world have taxes on refned ol nstead of gvng subsdes. After 2009, the proxmty of the Chna s gasolne prces and Brent crude ol prces reduced. To some extent, t s resulted from the reducton or even cancelng of government subsdes and a levy of refned ol consumpton tax. And the results show that government should not always set reasonable prces for gasolne. For example n the latter two phases, the smlarty between Chna s gasolne prces and Brent crude ol prces s not large and Chna's gasolne prces rose more than the nternatonal crude ol prces. But ol market competton s hghly nsuffcent n Chna. If the prces would not regulated by government whle formed by the market, asymmetry between chna s gasolne prces and nternatonal crude ol prces wll come because of market structure as those mentoned by Mchael Kendx & W.D.Walls. (2010) and Oladunoye O. (2008). So the refned ol prcng mechansm should be further studed and reformed. More companes should be permtted to enter the ol ndustry at frst, whch wll form full market competton, and then t s the tme that government s regulaton wll be replaced by market power. Acknowledgement 12

13 Thanks for the constructve suggestons of the anonymous referees. Ths work was supported by Leverhulme Trust, Natonal Natural Scence Foundaton of Chna ( , , ), Chna Postdoctoral Foundaton (2012M511277), Chna Humantes and Socal Scence Fund of Mnstry of Educaton (12YJC639276), the Fundamental Research Funds for the Central Unverstes (56AA13079, 56ZA12071 ), Maor proects for Jangsu Unversty Phlosophy and Socal Scence Key Research Base (2012JDM003), Jangsu Natural Scence Fund (BK ), Doctoral Fund of Chna Mnstry of Educaton ( ). Reference Bachmeer L.J., Grffn J.M., New evdence on asymmetrc gasolne prce responses. Revew of Economcs and Statstcs Bacon, R.W., Rockets and feathers: the asymmetrc speed of adustment of UK retal gasolne prces to cost changes. Energy economcs Balke N.S., Brown S.P.A., Yucel, M.K. (1998). Crude ol and gasolne prces: an asymmetrc relatonshp? Federal Reserve Bank of Dallas Economc Revew, Frst Quarter, Borensten S., Cameron A.C., Glbert R., Do gasolne prces respond asymmetrcally to crude ol prce changes? The Quarterly Journal of Economcs, 112, Duffy-Deno K.T. (1996). Retal prce asymmetres n local gasolne markets. Energy Economcs Godby R.M., Lntner A., Stengos T., Wandschneder B. (2000). Testng for asymmetrc prcng n the Canadan retal gasolne market. Energy Economcs, 22,

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