Policy-driven or market-driven? Evidence from steam coal price bubbles in China

This paper first verifies the existence and determinants of multiple bubbles in the steam coal market in China since the abolition of the double-track pricing system of coal and electricity in 2012. The Generalized Supremum Augmented Dickey-Fuller (GSADF) method confirms that the explosive bubbles originated mainly in 2013, 2014, 2015, 2016, and 2020, but this is not in accordance with the bubble model. The formation of bubbles is mainly due to policy changes related to de-capacity and environmental regulation. Furthermore, we find that price bubbles start in producing regions and transmit to the consumption regions. The demand-side factors drive the bubbles to spread in the reverse direction. The implication can infer that policy intervention in the coal industry should be reduced to ensure a market-oriented price mechanism and market stability. Producers and consumers, and investors need to pay attention to the spill over of price bubbles among regions, especially in major coal -producing areas.

Automated summary

This study verifies the existence of multiple bubbles in the steam coal market in China and identifies policy changes as the main driver. Bubbles originate in producing regions and spread to consumption areas, with demand-side factors driving the diffusion. The findings suggest reducing policy intervention in the coal industry for a market-oriented price mechanism and stability.