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The current 13th Five-Year Plan endorses the use of natural gas to achieve a cleaner energy mix. The objective of this research is to examine household natural gas demand and provide insights to natural gas exporters. Research on natural gas demand and cycles in China is valuable, because small changes in China’s demand (and hence import requirements) can have significant impacts on the global market. Five-Year cycles can trigger longer cyclical swings. In 1996, the 8th National People’s Congress passed a long-term plan to bolster heavy industry, resulting in an increase in urbanization and infrastructure development, and contributing to increased natural gas consumption. I apply an unobserved components model (UCM) to deal with data limitations and non-stationary relationship between variables, account for technological progress and periodically-changing administered prices, and allow for stochastic cycles to capture the effects of Five-Year Plans and economic cycle fluctuations. The estimated economic cycle captures the surge in economic growth in the early 2000s and the slowdown in economic growth and aggregate consumption due to decreased investment since 2013. Price changes, income growth, and increased infrastructure development (as manifested in the cyclical effect) contributed to the rise in demand. Natural gas is a normal good that is price-sensitive and approximately unit income-elastic. It is the preferred choice when accessible, and demand is still evolving and less likely to increase solely due to increased affordability. These results are robust to different variations that include allowing the stochastic level to capture the cycles and using a longer simulated price variable. Hence, in addition to income growth and natural gas price reform, environmental regulations to suppress coal consumption and government policies to foster natural gas accessibility by expanding infrastructure investment and development are vital to achieving a cleaner energy mix.

Economic Cycles and the Responsiveness of Natural Gas Demand in China’s Residential Sector