DESPITE turmoil in markets, the Chinese government is pressing ahead with pricing reforms in the energy sector.

On July 1, China’s new Shanghai Petroleum and Natural Gas Exchange Co opened in the city. The exchange is part of a nationwide effort to allow market-driven forces to determine the prices of energy products.

The deregulation comes after natural gas use in China in the first half of the year declined 2.1 percent from a year earlier. Global prices in all energy sectors have been roiled in recent months by excess supply amid slowing demand.

“Shanghai has a lot of strengths in sectors such as finance and maritime,” said Executive Vice Mayor Tu Guangshao, who presided over ceremonies opening the exchange. “Its worldwide influence means it is capable of hosting an exchange that bears the ambition of becoming global giant.”

The new exchange will focus on the trading of natural gas, both piped and liquefied.

In the week ended August 21, the price of piped natural gas remained at 2.49 yuan (US$0.39) per cubic meter at the new exchange, while the price of liquefied gas floated between 4,120 yuan to 4,130 yuan per ton.

Over the same period, global natural gas prices tanked 4.5 percent, their largest weekly drop since May. Futures for September delivery on the New York Mercantile Exchange fell 2.9 percent on that date to close at US$2.676 per million British thermal units.

The new Shanghai exchange comes on stream nine years after the launch of the Shanghai Petroleum Exchange, China’s first platform for trading oil products. Before that, Chinese regulators fixed spot prices of fuel oil products, according to changes in supply and demand in Singapore’s oil market.

Tu said the old exchange provides efficient experience for the new one. The future of the Petroleum Exchange as a separate entity remains in question.

The road to energy price deregulation has been a slow and careful process to avoid market shocks.

As early as November 2013, the National People’s Congress signaled that it wanted to make energy pricing more market-driven.

President Xi Jinping has since said, “A structural revolution has to take place in the energy industry to boost its development. The commodity value of energy products must be realized, and it is the market that ultimately decides those prices.”

Many provinces vied for the right to host the new energy exchange, but Shanghai won the prize in a decision announced last year.

The National Development and Reform Commission, China’s top economic planner, said in early August that one of its key tasks in the second half of the year is to upgrade the pricing tools related to natural gas.

Oddly enough, Xinhua News Agency is the largest shareholder of the new exchange, accounting for 30 percent of the 10 largest shareholdings. Domestic oil and gas giants China National Petroleum Corp and China Petrochemical Corp each hold 10 percent stakes.

Yu Shaoliang, vice president of Xinhua, said his agency wants to take an active part in the capital markets.

“Xinhua has notable advantages in information sourcing and compiling economic indicators,” he said. “Our ability to produce economic indices means we are capable of easily reflecting the real economy.”

Yu said the aim of the new exchange is also to transform China from a production and consumption giant to a global energy powerhouse, with its own voice in pricing.

“A world-class energy exchange, which will provide a fair and transparent trading platform for spot commodities, information exchange and financial services, is crucial to China’s energy power and safety,” said Yu.

In the lead-up to the start of the new exchange, Chinese industry experts had extensive discussions with counterparts from Britain and France.

Under the guidance of the National Development and Reform Commission and the National Energy Administration, the new exchange seeks to become the top natural gas exchange in Asia and the third-largest in the world, after the US and UK.

The government’s slow removal of its hands from pricing levers is expected to change the market over time. According to Wang Baowei, vice secretary of the National Development and Reform Commission, less than half of China’s natural gas supply was priced by market forces before the new exchange opened.

Government intervention is blamed, in part, for excess supplies over the years. China’s domestic natural gas production was growing at 8 percent a year, outstripping demand.

Though regulators have occasionally raised the price of natural gas, to the delight of producers, downstream consumers found higher prices unattractive, further damping demand.

Guo Jie, a researcher at China University of Petroleum, said the new exchange should more accurately reflect the tug-of-war between supply and demand. It should also provide tools for hedging seasonal variations.

Meanwhile, the Chinese government last year announced its long-term goal of non-fossil energy sources accounting for 15 percent of consumption by 2020 and 20 percent by 2030. That’s part of the strategy of weaning the nation off dirty coal burning that contributes to urban air pollution.

Yu Yibo, chief financial officer for China National Petroleum Corp, said a market-oriented pricing mechanism will reduce trading costs, allowing companies to divert extra profits into clean energy programs.

Shareholders of the exchange are taking a long-term view, estimating that it may take up to seven years for the new exchange to realize its full potential.

In the meantime, complex market realities pose a more immediate challenge for the operation of the new exchange.

“About 20 percent of players in the natural gas sector are currently taking part in trading on the new exchange, which is a small proportion compared with mature markets,” said Lin Boqiang, head of the China Center for Energy Economics Research at Xiamen University.

“This relatively small volume is not enough to leverage the gas price to any large extent,” he said.

“Yet, we must carry on the reform task and expect things to improve in the next three to five years,” he noted.