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MarketIntegrationintheChineseBeerand
WineMarkets:EvidencefromStationarityTest
CHAPTER·OCTOBER2015
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4AUTHORS,INCLUDING:
ChiKeungMarcoLau
ZhibinLin
NorthumbriaUniversity
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DavidBoansi
UniversityofBonn
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Market Integration in the Chinese Beer and Wine Markets:
Evidence from Stationarity Test
Marco Chi Keung Lau1*, Zhibin Lin1, David Boansi2, Jie Ma1
1.
Newcastle Business School, Northumbria University, City Campus East, Newcastle upon
Tyne, NE7 7QP United Kingdom.
2.
Department of Economic and Technological Change Centre for Development Research
(ZEF), Bonn, Germany.
*corresponding author: chi.lau@northumbria.ac.uk
To cite this article:
Lau, M. Lin, Z, Boansi, D. & Ma, J. (forthcoming). “Market Integration in the Chinese Beer and Wine
Markets: Evidence from Stationarity Test”, in Ignazio Cabras, David Higgins, David Preece (eds),
Brewing, Beer and Pubs: A Global Perspective, Palgrave Macmillan.
Abstract
Following the economic reform in China and subsequent economic growth, the country has
witnessed interesting shifts in dimensions of supply in various subsectors. This has in one
way or another, stimulated growth in national and per capita disposal incomes among other
economic indicators. In particular, there has been rapid growth in both beer and wine
consumption in the country. This chapter aims to examine the nature of the beer and wine
industry. Specifically we investigate price related issues and the degree of integration of the
Chinese beer and wine markets and the nature of price convergence/divergence across major
markets. The study utilises a 10-day interval data of beer and wine retail prices from January
2005 to December 2012 provided by the National Development and Reform Commission of
the People’s Republic of China. A series of unit root tests are performed to assess the price
convergence. The empirical findings suggest that Chinese beer and wine markets are not well
integrated, and there is no evidence of significant arbitrage activities in the wine and beer
markets. Implications for policy development were discussed.
1
Introduction
Prior to the economic and market reform, China was a relatively closed society and had faced
economic stagnation mainly due to the excessive centralised bureaucratic control (hence
misallocation of both investment goods and outputs and low total factor productivity).
Initiated in the late 1970s, the reform was set out to make the country wealthy and powerful
through reducing (but not eliminating) level of centralised planning and direct control to
correct the economic deficiencies (Perkins, 1988).
In the late 1970s, Chinese households had to do with barely sufficient food supplies
and rationed clothing. At the turning point at the “Third Plenum of the National Party
Congress’s 11th Central Committee” in December 1978, the central government decided to
undergo gradual economic reforms. On of the most fundamental reforms occurred in the
1980s and was aimed at converting the command economy to a price-driven market
economy, diluting the influence of the state in resource allocations. This goal was achieved
with the dual-track pricing system, in which some goods and services were allocated at state
controlled prices (e.g. energy products), while others (e.g. consumer goods) were allocated at
market prices1.
One direct outcome of that was the change of the country’s Soviet-type, centrally
planned system into a market-oriented system. The reform began cautiously in 1979 with
agricultural production in rural areas (to institute a household responsibility system which
allows formers to sell their surplus crops), and later expanded to urban industries (to create
special economic zones and welcome the establishment of Sino-foreign joint ventures for
advanced production technology and management knowledge). These changes have had
significant effects on agricultural and industrial production and productivity (Fan, Wailes, &
1
Almost all goods were allocated at market prices by the early-1990s.
2
Cramer, 1995). They have also helped the country gradually open its market to foreign
investment and expand its trade with the rest of the world. In the 1980s, the country
continued the reform and its economic landscape have changed dramatically. A new wave of
the economic liberalization (e.g., to open more cities and regions in the coastal provinces and
became a member of the International Monetary Fund and Wold Bank) has strongly
advocated the country’s market and globalization policies such as decentralization,
privatisation, free trade, free investment, and deregulations (Su, 2011). In the following
decade, more market-oriented and preferential policies (e.g., tax concession and labour
mobility) were given to the coastal provinces to boost foreign investment. The benefits of
these policies can be highlighted by the increasing international trade and sub-regional
economic cooperation between coastal provinces and neighbouring countries. Until more
recently, the country has maintained strong ties with the international market. In particular,
following the accession to the World Trade Organization (WTO) in 2001, many remaining
trading restrictions were removed (i.e., eliminate price protection to domestic industry and
eliminate export subsidies on agricultural products).
During the first decade of the 21th century, other economic and governance
infrastructure has also been reformed, such as opening share markets to foreign investors, the
open market agreement with the Association of Southeast Asian Nations (ASEAN), and the
ASEAN + 3 (China, Japan, South Korea) trade framework (CSIS, 2015). Following the
reform, the country become more integrated into the global capitalism system and has
enjoyed a historically subsequent economic growth. In addition, with trade liberalization and
restructuring of economic, social and geo-political/regulatory environments come
development in various supply indicators, including production, imports, exports,
consumption and most importantly retail prices. Obviously, over the last thirty years, the
country has witnessed interesting patterns/shifts in the aforementioned dimensions of supply
3
in various subsectors, and this has in one way or another stimulated growth in national and
per capita disposal incomes among other economic indicators.
Several drivers have steered trends and recent growth in the beer and wine markets,
which include: improvements in disposal income in both the urban and rural economy (hence
purchasing power) (Bouzdine-Chameeva, 2013; Swinnen, 2011), increasing migration (Zhao,
2003; Huang and Rozelle, 1998; Huang and Bouis, 1996), perceived gender-related health
benefits of beer and wine compared to spirits (Stone, 2014), stronger retail supply networks
(Access Asia Limited, 2010), developments in relative price of alcoholic beverages and
strong competition (Cui et al., 2012). Since the 1980s, both on-trade2 and off-trade3
consumption of beer and wine in China have been increasing (Cui et al., 2012), with major
surges being noted in the last decade (since the year 2003). From average beer and wine
consumers by rank during the 1960s to 1990s, since the year 2003 China has become the
largest beer market (volume-wise) in the world (Swinnen, 2011), the largest red wine market
in the world (Stone, 2014; Chow, 2014), and fifth in rank among the major wine consuming
nations. Besides this, the country is now the World’s fifth-largest producer of wine (Stone,
2014) and approximately 83 percent of wine consumed in the country between the years 2007
and 2013 was produced domestically (Chow, 2014).
Although China has a rich alcoholic drinks history, especially when compared to other
spirit drinks, i.e., rice wine, the consumption of beer and grape wine in the past was relatively
low and undifferentiated (Jenster and Cheng, 2008). Modern Chinese beer brewing and grape
wine-making can only be dated back to around 100 years ago, when modern brewing
technology was introduced to China in the late 1890s (Liu and Murphy, 2007). As the
demand grew by the foreign workers and soldiers, some foreign-invested and local Chinese
breweries/wineries started to emerge in some eastern cities of the country to serve the
2
3
On-trade consumption of beer and wine refers to purchase and consumption of beer and wine sold in restaurants, bars, etc
Off-trade consumption of beer and wine refers to purchase and consumption of beer and wine sold in retail stores
4
colonial powers (Heracleous, 2001). The few early beer breweries and wineries included the
ChangYu Winery in 1892, Russian’s Ulubulevskij Brewery (later Harbin Brewery) in Harbin
in 1900, the German and British’s joint-venture Germania-Brauerei Brewery and Winery
(later Tsingtao Brewery) in Qindao in 1903, the Scandinavia Brewery in Shanghai in 1910
and the TongHua Winery in Jilin in 1912. However, prior to the founding of the People’s
Republic of China (PRC) in 1949, the growth of the production was modest (Li, 2011) and
even ground to a halt because of the two world wars. Hence, the prices were high and the
beer and wine were mainly produced to serve the needs of expatriates and Chinese national
bourgeoisie (Bledsoe, 2011). In 1949, after the PRC was founded, a new stage of the modern
Chinese beer and wine industry began in the early 1950s and lasted over 25 years until the
late 1970s. At this stage, all breweries and wineries were confiscated and turned into stateowned enterprises. The development of the whole alcoholic drinks industry was largely
neglected as the beer/wine was treated as a non-essential consumer product in the country’s
industry restructuring. Despite the efforts by the government to rehabilitate the industry in the
late 1950s, the beer and wine production remained small-scaled and underdeveloped (Jenster
and Cheng, 2008). From the mid 1960s, some small-scaled breweries were created and the
production was gradually increased. Until the late 1970s, these breweries/wineries were
remained state-owned and the price were controlled and set by the government. From the
1980s, as a result of economic reform, the Chinese alcoholic drinks industry had recorded an
intensive growth in production. In the following three decades, the industry underwent
substantial development. Many state-owned breweries have been privatised (e.g., Harbin
Brewery, Tsingtao Brewery, etc.) and price controls lifted.
One of the most important economic reforms is the commodity price reform. The sign
of price convergence across different geographical locations is a pre-requisite for efficient
resources allocations and hence proper functioning of free market economy. In Chinese beer
5
and wine market we expect price convergence across cities because of several reasons. First
the entry of foreign brewers increase competition and the market structure moved towards a
perfectly competitive market, resulted in more arbitrage activities and price convergence.
Secondly liberalization of State Ownership Enterprise (SOE) allowed for heterogeneous
enterprise ownership forms including joint-venture and private ownership. This again
resulted in more arbitrage activities and price convergence. Another advance in the process of
marketization is the introduction of the Labour Contract System in 1986. The reform enabled
breweries to explore profit opportunities and enhance arbitrage activities by having greater
autonomy on sourcing of raw materials, setting selling prices, recruiting employees, and
changing wages within the enterprise. Price convergence is thus expected due to a more
efficient market across different cities. Nevertheless, interregional development and income
disparity and the persistent interregional trade barriers within China may inhibit such price
convergence.
Following post-reform developments in China, total consumption of beerincreased by
66.76 percent between the years 2003 and 2009 (Access Asia Ltd, 2009). This percentage
increase represents an increase in absolute volume from 24.30 billion litres to approximately
42.19 billion litres. This reflects annual percentage growth rate of 7.584 percent between the
two aforementioned years. With these, the country witnessed a 6.66 percent annual growth in
per capita consumption of beer, as per capita intake increased from 19.64 litres in the year
2003 to 30.84 litres in 2009 (representing an increase of 57.03 percent between the two
years).
Compared to less than 1 litre of beer consumed by the average beer consumer in China
during the years 1979 and 1980 (Swinnen, 2011), beer consumption per capita in the country
4
Average percentage growth= 100*(<final value> / <initial value>)^(1/<number of years covered>) - 100
6
is noted to have increased by approximately 30 times as of the year 2009. Although well
above the 2010 per capita beer consumption of less than 2 litres in India for example, per
capita beer consumption in China is still well below per capita consumption levels in the US
and Western and Central Europe (e.g. 156 litres per capita in Czech Republic, 130 litre per
capita in Ireland, and 116 litres per capita in Germany) (Swinnen, 2011). The relatively lower
per capita beer consumption in China, in spite of its role as the leading beer consumer in the
world, presents a major growth potential of the country’s beer market to both domestic and
foreign producers.
The observed developments in total and per capita consumption of beer in China
between the years 2003 and 2009 triggered a 125.02 percent (in current value terms) and
120.39 percent (in constant terms, with 2002 as base) increase in total expenditure on beer.
Total expenditure rose from RMB138.99bn to RMB312.77bn (in current terms) and from
RMB139.27bn to RMB306.94bn (in constant terms) between the years 2003 and 2009. Total
per capita expenditure on beer rose in current terms from RMB107.93 in the year 2003 to
RMB228.64 in the year 2009. In constant terms, these values were RMB108.14 and
RMB224.38 respectively for the years 2003 and 2009 (Access Asia Ltd, 2010). Over the
period 2003 to 2009, retail sales accounted for 66.53 percent of total volume consumed and
51.56 percent of total expenditure on beer. HoReCa (Hotel, Restaurant, and Catering/canteen)
sales accounted for 33.47 percent of total volume consumed and 48.44 percent of total
expenditure on beer over the aforementioned period.
Beside the escalations noted in the Chinese beer market, total and per capita wine
consumption in China increased respectively at average annual growth rates of 17.92 percent
and 17.90 percent between the years 2005 and 2012. Total volume of wine consumption
increased from 45.60 million 9-litre cases (Bouzdine-Chameeva et al., 2013) in the year 2005
7
(equivalent to 0.55billion bottles5) to 170.50 million 9-litre cases in the year 2012 (equivalent
to 2.05 billion bottles). This represents an increase in wine consumption of 273.94 percent
between the years 2005 and 2012. Along these developments in total wine consumption in the
country, per capita consumption increased from 0.3 litres in the year 2005 to 1.12 litres in
2012 (representing an increase of 273.33 percent). By this, total and per capita wine
consumption as of the year 2012 were almost 4 times the 2005 consumption levels.
A recent study by Vinexpo and IWSR (International Wine and Spirits Research), as
cited in Lodge (2012), reveals that wine consumption per person in China is anticipated to
further increase, reaching 2 litres by the end of the year 2015. French and Italian consumers
are expected to consume 50 litres per person per year, while consumers in the US are
expected to on average consume 13 litres per person per year. Current surges and anticipated
increments in future wine consumption in China are founded on increasing consumer
preference for red wine over other alcoholic beverages and developments in price of various
types of wine across major markets. In contrast, a respective decline of 18 percent and 5.8
percent in France and Italy, red wine consumption in China is reported to have almost tripled
between the years 2007 and 2013. Although well below the 51.9 litre average recorded for
France, per capita wine consumption in China is reported to have increased from the 2012
figure of 1.12 litres to 1.5 litres in the year 2013 (Chow, 2014) (representing an increase of
33.83 percent between the two years).
These developments in both beer and wine consumption have attracted greater
investment attention from domestic and foreign investors, who seek proper exploitation of the
opportunities presented by recent and anticipated developments in the Chinese beer and wine
industry. To enter into and succeed in the industry however, besides seeking ways to please
the consumers, there is a need to better understand the complex Chinese beer and wine
5
Computed by authors using a conversion factor of 83.35, thus number of bottles (billion) = total volume (million 9-litre cases) /83.35
8
markets, as relevant characteristic of such markets (most importantly developments in price)
vary from region to region. Such information is vital not only in aiding assessment of the
efficiency and effectiveness of beer and wine markets, but also in making informed
investment decisions on which markets have the potential to yield significant profits for
investors based on the heterogeneous objectives of investors. Investigating the level of
integration of the retail market on beer and wine across regions in the largest transitional
market of China is the primary objective of this study. This is to help inform agribusiness
investment decisions on effectiveness of the Chinese beer and wine industry, and to guide
exploitation of current and future opportunities presented by the industry. China’s increased
disposable income and rise of middle class allowed many consumers to afford foreign-made
and foreign-branded alcoholic beverages. It’s important for both domestic and foreign
companies to understand the marketization status of different cities in face of changing
regulatory environment. The distinguishing feature of our study is that it allows us to identify
which cities are more competitive and integrated.
9
Literature Review
Under regularly assumed restrictions on preferences and technologies, a competitive market
equilibrium exists (Ravallion, 1986). In general, this also holds for the spatial competitive
equilibrium of an economy consisting of a set of regions among in which trade occurs at
fixed transport costs. Such equilibrium has the property that, if any trade takes place between
any two regions, price in the importing region equals price in the exporting region plus the
unit transport cost. Under this circumstance, the markets can be said to be spatially
integrated. Market integration can thus be defined as the extent to which changes in prices
within one market lead to changes in prices in another. In other words, differences in the
prices of a given product across regional markets can be interpreted as a signal of the degree
of market integration in a general equilibrium sense: a shortage in one regional market
increases the price, which then attracts suppliers from neighbouring markets (Gibson, 1995).
The resultant increase in supply in one market and increases in price in source markets
continues until differentials are eliminated, net of transport cost differentials. In an integrated
market, products flow away from locations where the price is low and towards locations
where the price is high. These flows enforce the Law of One Price.
Any factors that affect trade between markets affect market integration, for example
trade costs, trade barriers and price discrimination (Yu, Lu & Luo, 2013). The cost of
arbitrage plays an important role in determining the degree of market segmentation (Lutz,
2004) Zhou, Wan, and Chen (2000) suggested that access to price information and
availability of transport are the most stressed exogenous factors affecting price behaviour.
Related to transport which is the distance between markets. Distance, in principle, should not
be an obstacle to market integration, though it affects the speed of market integration. In
international markets, there are three major sources of price discrimination across national
boarders, i.e. demand elasticity, import quota and collusion – which affect international
10
pricing (Verboven, 1996). Within a domestic market, the regional differences in demand
(income effect) and supply (competition effect) are the major factors that affect price
integration (Yu et al., 2013).
The existing literature on market integration in China show mixed and inconclusive
results. Young (2000) argues that although twenty years of economic reform have brought
extraordinary economic growth and burgeoning international openness, it has also resulted in
a fragmented internal market, due to the rise of local protectionism. Based on five fairly
aggregated sectors, he finds that prices of goods diverged and resource allocation were
deviated from the principle of comparative advantage. Zhou et al. (2000) analysed the rice
markets in southern China using the monthly prices of indica rice from 35 major cities with
the time series extends from February 1992 to May 1996. Their results show that there is a
general lack of integration among the indica rice markets in China. They suggested that the
poor transport facilities, government interventions, and the limited amount of grain available
for arbitrage as the major impediments to market integration. Poncet (2005) examined the
industry-level domestic trade flows between Chinese provinces to measure domestic market
integration in China in 1992 and 1997. The results show international trade barriers dropped
but domestic trade barriers (between provinces) increased, underlining the fragmentation of
the Chinese domestic economy and even the spread of local protectionism over the period.
The author concluded that rather than a single market, China appears as a collection of
separate regional economies protected by barriers, which include a variety of protectionist
policies, such as regulatory, physical and judicial obstruction (Young, 2000). Poncet’s (2005)
study confirms that provinces’ domestic trade protection pursues a dual objective of socioeconomic stability preservation and fiscal revenues maximization. Gravier-Rymaszewska,
Tyrowicz, and Kochanowicz (2010) analysed the effects of intra-provincial disparities on the
development of the 28 mainland provinces in China and found that while the growth in China
11
increases, the difference in wage levels in each sector along with the inequality is also rising.
They concluded that prices in China did not reflect the relative scarcity of goods.
However, Chen, Goh, Sun, and Xu (2011) suggested that the past three decades have
witnessed a high level of domestic market integration in China, which include various
dimensions such as urban agglomeration, rural­urban migration and integration on the labour,
product, and capital markets. They argue that particularly for the product markets, which
have become significantly more integrated, as regional trade increased and product prices
became more similar across regions. Chen et al. (2011) argue that there has been emerging
evidence of increasing integration of China’s internal markets of goods and commodities.
Chen et al. (2011) argued that evidence based on more refined data supports increasing
regional specialization and product market integration over time. Holz (2009) argues that
there is evidence to support that China has seen an increasingly integrated domestic product
market, which is well within the range of that of a normal, relatively integrated large
economy. Similarly, Huang, Rozelle, and Chang (2004) found high degrees of integration
between coastal and inland markets and between regional and village markets in China’s
agricultural sector, since its accession to the World Trade Organization. Nagayasu and Liu
(2008) examined the relative prices and wages in China based on the annual data of the 29
provinces in China from 1995 to 2005 and reported a strong evidence of non-divergence in
the prices of provinces vis-a-vis those of the benchmark (Beijing).
Given the mixed and inconclusive results, in the next section of our paper we
investigate this effect using advanced empirical strategy, which is based on sound theoretical
base to find out if prices on beer and wine products have converged across Chinese regions.
Allocative efficiency in the goods market is an important outcome of market liberalization.
China becomes one of the largest consumer markets for alcoholic drinks but its allocative
efficiency has not been examined. Therefore we provide the first attempt in investigating how
12
well the retail market on beer and wine has been integrated across regions in the largest
transitional market of China. Our study on market effectiveness is based on the economic
theory of “Law of One Price” in an efficient market. The concept was developed by Gustav
Cassel in 1920 saying that, identical goods should converge to one price across regions due to
the force of “arbitrage activities”. Gibson and Smout (1995) argue that a reduction in price
differential between regional markets, until they represent nothing more than transport cost
differences represents an efficient market condition. However the existence of trade barriers
(i.e. lack of infrastructure or heterogeneous policies) and imperfect market structure may
result in price divergence across domestic markets.
13
Data and Results
We utilize a 10-day interval data from January 2005 through December 2012, and the data
collected from the Price Supervision Centre under the National Development and Reform
Commission (NDRC) of the People’s Republic of China (PRC)6. Our data covers domestic
consumed beer and domestic consumed wine. Data was collected at 10-day intervals
respectively at 5th, 15th and 25th of each month. We have 250 observations per city on
average. Firstly, we construct relative price series towards the national average price, so that
the series of interest for a particular alcoholic product in city i, at time t, is g , we have
g

yi ,t  ln  i ,t 
g
t 

Where
yi ,t
t= 1,…,T
is the relative price series,
(1)
g i ,t
is the price level, and
gt
is the average price
level across all cities at time t. Wine becomes popular in China, we can see from Table 1 that
the average price for wine was RMB36.6 per bottle from 21, January 2006 to 01, November,
2010, and the mean price difference was -0.085 (see Figure 3, Panel A). The price for wine in
most cities is lower than the national average price. (see Figure 4, Panel A) The price for beer
is about RMB2.98, and the price variation across cities is lower than that of wine. (see Figure
4, panel B). The price for beer in most cities is lower than the national average price. (see
Figure 4, panel B). To our best knowledge our data set is the first attempt to cover 141 cities
to provide robust study (Detailed cities names are provided in appendix). The econometrics
method we use is “unit root test”. This applied econometrics test plays an important role in
mainstream economics research as it was developed by Dickey and Fuller (1979) 7, numerous
surveys and studies introduced this method since then (see, Perman,1991; Campbell and
6
For details:
http://www.chinaprice.com.cn/fgw/ProxyServlet?server=e450&urls_count=1&url=info/S_0_0_0_0.htm
7
The article received 4322 citations from different social science disciplines since its publication.
http://scholar.google.com/scholar?hl=zh-CN&q=Dickey+and+Fuller+%281979%29&btnG=&lr=
14
Perron , 1991; and Dolado et al., 1990). Several important topics in economics and finance
adopt unit root test, including purchasing power parity, unconditional income convergence
hypothesis, and financial market bubbles, corporate profit persistence, financial leverage
mean reversion, and price convergence. Unit root test is used to test for the stationarity of a
time series. As many time series, for example beer price may fluctuate in the short run after
an external shock of increase in import tax. However the price fluctuation will stop
eventually, we call this time series “stationary” if it exhibits these characteristics of
“stationarity”. Otherwise the data set was said to contain a “unit root”. We can use this
terminology to examine if two cities show evidence of price convergence by applying unit
root test to their relative price. If the relative price exhibits stationarity behaviour then price
convergence is evident.
15
Panel A: Price for Wine
2,000
Series: Price
Sample 1/21/2006 01/11/2010
Observations 7562
1,600
1,200
800
Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis
36.62361
33.30000
162.0000
7.800000
18.11915
3.538451
23.11738
Jarque-Bera
Probability
143297.2
0.000000
400
0
20
40
60
80
100
120
140
160
Panel B: Price for Beer
2,000
Series: Price
Sample 1/11/2005 5/01/2009
Observations 8515
1,600
1,200
800
Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis
2.985728
2.910000
7.000000
1.100000
0.990329
1.307192
5.365741
Jarque-Bera
Probability
4410.677
0.000000
400
0
1
2
3
4
5
6
16
7
Panel C: Price Difference for Wine
1,200
Series: Price Difference
Sample 1/21/2006 1/11/2010
Observations 7562
1,000
Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis
800
600
400
200
-0.085081
-0.086085
1.550105
-1.572147
0.402699
0.081726
5.703972
Jarque-Bera
Probability
2312.139
0.000000
0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
Panel D: Price Difference for Beer
800
Series: Price Difference
Sample 2/21/2005 6/01/2009
Observations 8515
700
600
Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis
500
400
300
200
Jarque-Bera
Probability
100
0
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
17
0.8
-0.047754
-0.045724
0.932856
-0.980119
0.304882
0.241648
3.421045
145.7675
0.000000
Figure 1: Summary Statistics
Panel A: Wine
Price Difference
.4
.2
.0
-. 2
-. 4
-. 6
-. 8
I
II
III
IV
I
II
2006
III
IV
I
II
2007
III
IV
I
2008
M ean
II
III
IV
2009
I
2010
+ / - 1 S . D.
Panel A: Beer
Price Difference
.4
.3
.2
.1
.0
-. 1
-. 2
-. 3
-. 4
-. 5
I
II
III
2005
IV
I
II
III
IV
I
2006
II
III
IV
2007
M ean
+/- 1
I
II
S . D.
Figure. 2: Mean and Standard Deviation of Price Difference
18
III
2008
IV
I
II
2009
Univariate Unit Root test
A rigorous assessment regarding price convergence across Chinese markets can be carried
out through a univariate unit root test and panel unit root test8. Panel A of Table 1 presents
unit root tests of relative price series for Wine using evidence from 105 Chinese cities. Of
the 105, only 11 cities or 10.5% of the total number showed price convergence for wine. For
Beer, the convergence rate is much lower. Only 5 cities or 3.5% of cities showed evidence of
price convergence. Based on these results, we can therefore conclude that Chinese alcoholic
markets are not well integrated, and there is no evidence of significant arbitrage activities in
the wine and beer market. It is possible that significant transaction cost, internal trade
barriers, and imperfect market structure exists.
Robustness check: Panel Unit Root Test
Bearing in mind the criticism laid in literature against univariate unit root test of lacking
statistical power, we made use of several panel unit root tests to check robustness of our
results. The outcome is presented in Table 2. The empirical finding suggests that there is a
general lack of evidence for price convergence for wine and beer market. This finding is in
line with a previous study, in which, the authors concluded that non-perishable consumer
goods have the lowest rate of convergence amongst all other consumer goods in China (Fan
and Wei, 2006). Existing convergence literatures are also interested in the degree of local
protectionism or market structure in other industries, for example, textiles, automobile, and
gasoline sector. For the Russian textiles sector there is strong evidence in favour of market
integration and hence less hidden trade barriers in the domestic market (Lau and
Akhmedjonov, 2011). This finding suggests that textile market is efficient in Russia attributed
to a better regulation and institutional arrangement with anticipated WTO accession. In
8
Interested reader should consult the literature on unit root test (see for example: Campbell and Perron, 1991; Dicky and Fuller, 1979; Levin,
Lin & Chu 2002; Im, Pesaran and Shin 2003; Maddala and Wu, 1999).
19
another study that focuses on the automobile market in the European Union over the period
1995 to 2005, the authors found that exchange rate uncertainty is the cause of price
divergence across EU countries. And they concluded that trade liberalization is the key
determinant for regional integration in the long run (Gil-Parej and Sosvilla-Rivero, 2008).
Finally, a study explored the price convergence mechanism in the Canadian retail gasoline
market since 2000, and it concludes that the internal market is well integrated, even in face of
the fuel prices regulation in Nova Scotia and New Brunswick, which may potentially distort
the national gasoline market.
The robust evidence of lacking price convergence on the beers and wine market
indicates that the alcoholic consumer market still remains as a collection of separate regional
markets protected by barriers rather than a single market. And this empirical finding poses the
question of whether new business ventures entering the domestic market could earn abnormal
profit and capture market share. Therefore further research is needed to examine the
determinants of price convergence in the beers and wine market in China.
20
Table 1: Univariate Unit Root Test of Relative Price
Panel A: Wine (Evidence based on 105 Cities)
City
Probability Value Significance Conclusion
0.0002
***
Converging to the national mean price
Mianyang
0.0907
***
Converging to the national mean price
Yinchuan
0.0083
***
Converging to the national mean price
Yantai
0.0532
**
Converging to the national mean price
Jinzhou
0.011
***
Converging to the national mean price
Beihai
0.0196
***
Converging to the national mean price
Jilin
0.0128
***
Converging to the national mean price
Nanjing
0.0511
**
Converging to the national mean price
Luoyang
0.0252
**
Converging to the national mean price
Tai'an
0.0076
***
Converging to the national mean price
Tonghua
0.008
***
Converging to the national mean price
Anshan
Number of instances of convergence
11 cities or 10.5 percent
Note: Null hypothesis is that each relative price series contains a unit root. ***and ** denote 1% and 5% significance level respectively.
Panel B: Beer (Evidence based on 141 Cities)
City
Probability Value Significance
Xiamen
0.0006
***
Shanghai
0.0152
***
Dalian
0.0452
***
Anqing
0.0142
**
Xingtai
0
***
Number of instances of convergence
5 cities or 3.5 percent
Note: Null hypothesis is that each relative price series contains a unit root.
21
Conclusion
Converging to the national mean price
Converging to the national mean price
Converging to the national mean price
Converging to the national mean price
Converging to the national mean price
*** and ** denote 1% and 5% significance level, respectively.
Table 2: Panel Unit Root Tests of Relative Price Series for China's 105 Cities
Panel A: Wine
Method
Null: Unit root (assumes common unit root process)
Levin, Lin & Chu t
Statistic
Prob.**
4.167
Null: Unit root (assumes individual unit root process)
Im, Pesaran and Shin W-stat
ADF - Fisher Chi-square
1
2.183
207.89
0.986
0.4891
Panel B: Beer
Method
Statistic
Null: Unit root
(assumes common unit root process)
Levin, Lin & Chu t*
Null: Unit root
(assumes individual unit root process)
Im, Pesaran and Shin W-stat
ADF - Fisher Chi-square
1.003
Prob.**
0.842
4.256
1
215.66
0.918
22
Discussion and Conclusions
The main objective of study is to investigate the level of integration of the retail market on
beer and wine across regions in the largest transitional market of China. We can conclude that
Chinese alcoholic markets are not well integrated, and there is no evidence of significant
arbitrage activities in the wine and beer markets. After more than a decade’s integration with
the world’s economy following its economic reforms and accession to World Trade
Organization (WTO), China remains as a collection of separate regional markets protected by
barriers rather than a single market, as reported by Poncet (2005). There has been limited
cross-regional price convergence that can be reflected in the test of the Law of One Price in
beer and wine markets. Our evidence of beer and wine prices across different cities in the
country tends to support Young (2000) and Poncet’s (2005) observation, that China remains a
fragmented market, opposing Holz’s (2009) argument that China has become a relatively
integrated economy.
There are several factors that could affect market integration as discussed in the
literature review section. Speedy access to quality price information and the availability of
transport facilities are the most cited exogenous factors affecting price behaviour (Zhou et al.,
2000). Given the fast and widely adoption of the internet, mobile technology and other
Information and Communication Technologies (ICT), and the drastic improvement of
transportation facilities particularly the development of high speed railways in China, the
information and transport factors might no longer pose barriers to interregional trade. One of
the major factors of interregional trade barriers could be local governments’ protectionism. As
argued by Young (2000), although the central government has released control over prices,
this function has been taken up by local governments.
Poncet (2005) points to local
protectionism as a major barrier to market integration, because local governments pursue a
dual objective of socioeconomic stability preservation and fiscal revenues maximization. Due
23
to the growing interregional competition between duplicative industries, such as beer and
wine production, local governments imposed a variety of interregional barriers to trade,
which subsequently led to the fragmentation of the domestic market.
Other key factors that inhibit market integration are the historic differences among
regions within China. One of such factors is the interregional income disparity in China,
which is particularly prominent. Pedroni and Yao’s (2006) study shows that per capita
incomes in the coastal provinces do not appear to be converging toward one another. The
authors reveal that the growth patterns among provinces with similar degrees of preferential
open-door policies follow divergent paths, and likewise the growth of interior provinces as a
group do not show a converging pattern, but are in general diverging too. Lau (2010) further
reports that the gap of income levels between Chinese provinces have been widening since
the country’s economic reforms. The growth patterns along with other differential factors
among regions in China are unlikely to become homogenous in the short run. Yet all these
factors will continue to influence the economic performance of these regions as well as their
differential consumer demand and subsequently prices.
The benefits of regional integration, the aggregate efficiencies associated with internal
integration are usually desirable (Baldwin and Venables, 1995). Moreover, internal
integration may also have important redistributive effects, because the reductions in the costs
of inter-regional transactions help to reduce interregional income differences and increase
national growth rates (Martin, 1999). However, as suggested by Eberhardt, Wang, and Yu
(2013), local protectionism prevents the efficient allocation of resources and attenuating the
benefits of scale economies and spatial spill-overs and such protective behaviour not merely
harms domestic market efficiency, but also offsets potential gains from a more liberal
international trade policy regime. Implications for policy development of this study are that
the Chinese central government needs to reduce local governments’ protectionism in the beer
24
and wine markets so as to promote market integration and thus market efficiency. Moreover,
government policies should also encourage brewers in the country to specialize according to
their comparative advantages. Obviously local traders who want to take advantage of price
differential among different cities will not be successful because of the lack of arbitrage
opportunities and the unique market structure in these markets (i.e. allocative inefficiency).
Further reforms to reduce regional disparity are imperative. The Chinese government
has already implemented policy initiatives such as the “Western Great Development” in 1998,
the “Northeast Revival” in 2003 and the “Rise of Central China” in 2004 to narrow the gaps
of economic development between regions in China. These policies provide excellent
opportunities for investors, both foreign and domestic. The relatively poor regions have
comparative advantages such as the low prices of land and labour prices. As our study shows
that regional disparity still exists, it is recommended that the government should focus on
public investment in infrastructure and education systems, improving the efficiency of
production and increasing the rate of returns on investment in the lagging regions. Continued
financial reform is particularly needed in order to improve investors’ access to finance in
inland provinces and rural areas (Wang, Wan and Yang, 2014). Furthermore, as Wang et al.
(2014) suggested, both central and local governments should assume a clear and proper role,
for example, the central government should focus on regional equalisation while the local
governments should focus on public services and social development.
Implications for foreign brewers entering Chinese market are that they must not
consider China as one single market but as multiple subnational regional markets, as there is
lack of market integration within China as shown in this study. Given that China is such a
segmented market and the increasing purchasing power of a growing middle class in China’s
major cities, one strategy for foreign beer brands is to focus on highly developed cities such
as Beijing and Shanghai. There is plenty of opportunity for foreign beer and wine brands to
25
succeed in China, as per capita beer consumption is only 35 litres annually when comparing
to 75 litres in the U.S. This is particularly true for premium beer because consumers’
willingness to pay is higher for foreign brands that give them superior status perception.
The main limitation of our study is that we do not examine the determinants of price
divergence and future research has to address this issue in more detailed ways. Another future
research direction could be consumption convergence for beer and wine. There is a
significant regional disparity in income and wealth across Chinese regions (Lau, 2010).
Therefore it is interesting to examine whether big cities generate higher demand
(consumption per person) compared to small towns out in the provinces.
26
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Appendix : Chinese cities included in our study
Anqing
Anshan
Anshun
Baoji
Baotou
Bayingolin Mongol Autonomous Prefecture
Beihai
Beijing
Bijie
Changchun
Changde
Changsha
Changzhi
Chengdu
Chenzhou
Chongqing
Chuzhou
Dalian
Daqing
Datong
Fuzhou
Ganzhou
Golmud
Guandu District
Guangzhou
Guigang
Guilin
Guiyang
Haikou
Hami Prefecture
Hangzhou
Hanzhong
Harbin
Hefei
Hengshui
Heze
Hinggan League
Hohhot
Huangshi
Hulunbuir
Huzhou
Ili Kazakh Autonomous Prefecture
Jiamusi
Jiangmen
Jiaxing
Jilin
Jinan
Jincheng
Jinhua
Jinzhou
31
Jiujiang
Jiuquan
Kongtong District
Kunming
Lanzhou
Lhasa
Lishui
Liupanshui
Liuzhou
Mudanjiang
Nanchang
Nanjing
Nanning
Nanping
Nantong
Nanyang
Neijiang
Ningbo
Ordos City
Panjin
Panzhihua
Pengxi County
Pingluo County
Pu'er City
Puyang
Qiandongnan Prefecture
Qianjiang
Qiannan Prefecture
Qianxinan Prefecture
Qingdao
Qinhuangdao
Quanzhou
Qujing
Quzhou
Renshou County
Sanming
Sanya
Shanghai
Shangqiu
Shantou
Shaoguan
Shaoxing
Shenyang
Shenzhen
Shijiazhuang
Shizuishan
Suzhou
Tai'an
Taiyuan
Taizhou
Tangshan
Tianjin
Tianmen
Tieling
Tonghua
Tongling
Tongren
Ürümqi
Weinan
Wenzhou
Wuhai
Wuhan
Wuhu
Wuzhong
Xi'an
Xiamen
Xiangyang
Xianyang
Xingtai
Xining
Xinxiang
Xuanhan County
Xuzhou
Yan'an
Yanbian Prefecture
Yangzhou
Yantai
Yichang
Yichun
Yinchuan
Yiyang
Yuncheng
Zaozhuang
Zhangshu
Zhangzhou
Zhanjiang
Zhengzhou
Zhongwei Xian
Zhoukou
Zhoushan
Zhuhai
Zunyi
32
33