A Study on the Pass-Through Rate of the Exchange Rate on the Liquid Natural Gas (LNG) Import Price in China

Chaofeng Tang,Kentaka Aruga

doi:10.3390/ijfs8040070

Abstract

The Chinese liquid natural gas (LNG) import price has been unstable because the stability of LNG import prices is related to changes in the exchange rates. This paper analyzes the pass-through rate of the Chinese Yuan (CNY) and Japanese Yen (JPY) on the Chinese LNG import price. The Time-Varying Parameter vector autoregressive (TVP-VAR) model is adopted to verify the pass-through rate of the exchange rates on the LNG import price using the Markov chain Monte Carlo (MCMC) method. Since September 2005, the JPY pass-through rate on the Chinese LNG import price has been decreasing while that of the CNY has been increasing. Notably, the pass-through rate of CNY began to exceed that of JPY after 2008. Moreover, since 2005, the lag effect of the CNY on the Chinese LNG import price became longer compared to JPY. If any new currency reform of the CNY is implemented in the future, then the impact of JPY on the Chinese LNG import price could be reduced and the lag effect of the CNY on the Chinese LNG import price could become longer. Therefore, the fluctuation of the CNY is becoming an important factor in understanding the movements of the Chinese LNG import price. This implies the significance of considering the effect of the exchange rate on an energy market when the market is influenced by a monetary reform of the importing country.

Highlights

As the value of Chinese Yuan (CNY) appreciated after the financial crisis, the effects from the CNY on the liquid natural gas (LNG) import price tended to decline from April 2008 to February 2012
This paper provided an overview of the empirical methodology of the Time-Varying Parameter vector autoregressive (TVP-Vector autoregression (VAR)) model with stochastic volatility, as well as its application to the pass-through rate of the Japanese Yen (JPY) and CNY on the Chinese LNG import price
The results of our study indicate that if a new CNY monetary reform takes place in the future, the effects of JPY on the Chinese LNG price will be reduced and those of the CNY on the Chinese LNG price is likely to become stronger

Summary

Introduction

One reason why the Asian LNG price has been higher than other regions is that the Asian LNG import price is known to be related to the average price of Japanese CIF (Cost, Insurance, and Freight) crude oil import price (Ministry of Economy 2016). From the perspective of price stability, it is necessary to reconstruct a different pricing mechanism from the conventional one, which reflects the supply-demand balance on the Asian LNG import price. This is crucial for the Asian natural gas markets to attract market participants (Tong et al 2014; Choi and Heo 2017). Little is known about how the market mechanism functions in determining LNG import prices in the Asian region

Methods

Results

Conclusion