China has limited immediate supply disruption from Middle East tensions, supported by its energy mix and strategic reserves. The larger challenge is rising input costs, which are putting pressure on corporate margins.
Key takeaways
- 35% of oil flows passing through the Strait of Hormuz are destined for China
- +0.5%: first annual rise in producer prices in 41 months
- 100+ days: equivalent of China’s strategic oil reserves in days of net imports
China’s Energy Mix Limits Supply Risk
China is better positioned than many Asian economies to manage a prolonged period of Middle East tensions. While several regional peers rely heavily on imported hydrocarbons, China’s energy mix remains anchored by domestic coal.
Oil and gas account for 39% of China’s final energy consumption, well below the global average of 62%. That reduces the country’s immediate exposure to disruptions in oil and gas markets.
China also holds substantial strategic oil reserves, covering nearly 100 days of net imports. As a result, even though 35% of oil flows through the Strait of Hormuz are destined for China, the risk of immediate physical shortages remains limited for now.
Higher Costs Are Moving Through the Economy
Supply flows have remained stable, but costs are rising.
Higher energy and chemical prices are beginning to filter through the Chinese economy. In March, producer prices rose 0.5% from a year earlier, the first annual increase in more than three years. Petrochemicals were a key contributor to the increase.
For now, much of the added cost is being absorbed by midstream and downstream sectors as final demand remains fragile. Consumer inflation has stayed contained, helped by fuel price controls, the growing share of electric vehicles and subsidies for state-owned refiners.
Rising input costs are starting to weigh on profitability
Several sectors, including textiles, chemicals and synthetic fibers, have already reduced output. Regulatory requirements and compliance costs are adding to the strain.
Small and midsize companies are especially exposed because they generally have less pricing power and fewer financial buffers. Larger companies are better positioned to manage higher costs through long-term supply contracts, economies of scale and stronger balance sheets.
A Mixed Outlook for China’s Export Position
Middle East tensions could strengthen China’s industrial position relative to more energy-dependent economies, including ASEAN countries and India. The shift also may support global demand for Chinese green technologies, including electric vehicles, batteries and solar products.
The main risk is a prolonged period of elevated energy prices. If energy prices were to double compared with pre-crisis levels, global growth could fall by more than 1% in 2026. That would likely reduce external demand for Chinese exports.
China is avoiding a major supply shock for now. The more immediate challenge is margin pressure, especially for companies with limited ability to pass higher costs on to customers.
China is currently managing to avoid a major supply shock thanks to its energy mix and industrial ecosystem. But the sustained rise in costs is creating a new vulnerability: that of margins, particularly for the most exposed companies and those least able to pass on price increases.
Junyu Tan, economist for North Asia
