China's oil product pricing mechanism: What role does it play in China's macroeconomy?

- We evaluate China's oil product pricing mechanism based on a 14 year span of monthly data.
- The mechanism does not appear to respond asymmetrically to international oil price.
- The effect of the mechanism on the Chinese macroeconomy is very limited.
- Potential deregulation of oil product price may not harm the Chinese macroeconomy.

The oil product pricing mechanism is a regulation system that was introduced in the late 1990s to control the oil product prices in China. For the first time to our knowledge, we provide an empirical evaluation of this regulation system, with a particular focus on its role in China's macroeconomy. Based on monthly data between 2000 and 2013, we find that: (i) contrary to the general public's impression, the mechanism is 'fair' overall in the sense that it responds to the rise and fall of international oil price symmetrically; (ii) the effect of the mechanism on the Chinese economy, however, is very limited; and (iii) the limited effect of the mechanism holds for different levels of regulation during the studied period, suggesting that potential deregulation may have little impact on the economy.