Energy market reforms in China and the time-varying connectedness of domestic and international markets

Abstract

China is the world's largest energy consumer and a considerable force in international energy markets. Continuous market reforms in the country together with the ongoing energy transition due to the commitment to carbon neutrality have brought fundamental changes to Chinese energy markets and have resulted in new sources of uncertainty in international energy markets. It is therefore important to investigate market linkages between China and the world from a dynamic perspective. This paper adopts the time-varying parameter VAR (TVP-VAR) model and the network spillover approach to explore the time-varying linkages between China and the international energy markets. The results show that the marketization process in China has led to significant changes in spillover patterns between international energy markets and Chinese domestic markets. Dynamics in the Chinese energy markets have played an increasingly important role in affecting international energy price movements. There is also clear evidence that the energy transition process in China has driven risk spillovers from the country to the international energy markets.