Cross-market Price Linkage Research Between SHFE Ali And LME Ali

This paper seeks to explore price linkage between SHFE Ali and LME Ali between 1995 and 2017,in order to demonstrate the influence of market and policy changes on the linkage of these two markets over a relatively long period of time.Based on literature review and industry interviews,this paper divides 1995 to 2017 LME Ali price and SHFE Ali price into 4 periods of time according to market and policy changes,to explore the relationship changes among these two markets after major policy changes based on empirical analysis to each time period.This paper finds that LME Ali futures price and SHFE Ali futures price have long term co-integration relationships with each other over each periods,.In the early two periods(from 1995 to 2006),there was a two-way guiding role between LME aluminum and SHFE aluminum.After the inception of China's aluminum export tariff in 2006 and various reasons,LME aluminum had a one-way guiding role to Shanghai aluminum.The results of variance decomposition,impulse response and VEC model all suggest the same pattern: First,the influence of LME aluminum on SHFE aluminum is stronger in each period,and the influence of SHFE aluminum on the LME aluminum is relatively small,LME aluminum has a dominant role.Furthermore,the mutual influence between the price of SHFE aluminum and LME aluminum have similar patterns: comparatively small in the first period(1995-2002),rise in the second period(2002-2006),decline in the third stage(2006-2013)and rise in the fourth stage(2013-2017).The main reason for these changes originates from China's regulatory policy changes.Based on the policy analysis from 1995 to 2017 and its impact on China's Aluminum industry,this paper aims to improve the international influence and long-term development of China's Aluminum industry,therefore proposes policy recommendations to policy makers regarding delivery regulation,import and export policy and trading regulations.