21 Editorial | The Middle East Situation-Induced Energy Crisis Has Limited Impact on China's Economy

How can China’s energy resilience withstand global supply chain shocks?

The ongoing tensions in the Middle East are impacting global energy security, compounded by a price surge triggered by chip shortages. The global economy is facing a dual shock to supply chains and energy similar to that of 2022. The risks in the industrial chain continue to escalate, and the chain reactions at the economic level may further amplify, potentially dragging down global economic growth.

Currently, the world is simultaneously experiencing two supply-side shocks. Since the end of last year, the price surge of storage chips has not only persisted but also continued to transmit to the end market. Samsung, SK Hynix, and Micron monopolize over 90% of the global DRAM capacity. Since last year, with the surge in AI computing power demand, the demand for high-end storage has rapidly increased, leading these three companies to shift over 80% of their advanced capacity to high-end products, actively compressing mature process capacity. The contraction on the supply side, combined with downstream panic buying, has led to a tight supply of consumer-grade storage chips, with prices skyrocketing, thereby raising manufacturing costs in consumer electronics, AI servers, smart vehicles, and other fields.

The impact has not stopped at storage chips. The deterioration of the situation in the Middle East has caused helium production facilities in Qatar to shut down, while helium is an essential cooling and temperature control material in the chip manufacturing process. Qatar supplies about one-third of the global helium, and its supply interruption will severely impact the global semiconductor industry chain, potentially leading to capacity contraction and price increases. Meanwhile, the global passive components industry has also announced price increases, and the electronics industry may enter a new round of price hikes. Currently, some domestic smartphone brands in China have begun to collectively raise prices.

On the energy front, the ongoing deterioration of the situation in the Middle East has led to a practical paralysis of transport in the Strait of Hormuz, directly affecting about 20% to 25% of global crude oil shipping volume and 20% of liquefied natural gas (LNG) trade. The short-term supply reduction combined with geopolitical uncertainties is pushing up international oil and gas prices. Oil is the “blood of industry,” and a significant rise in oil and gas prices will drive up costs across the entire industrial chain, including energy, chemicals, fertilizers, logistics, and textiles, potentially triggering more stubborn inflationary pressures. In 2022 and the following years, Europe and the United States suffered from inflation due to soaring oil and gas prices and were forced to maintain high interest rates.

In contrast, the likelihood of China being directly impacted in this round of the oil crisis is relatively low. China’s electricity supply mainly relies on coal and new energy, with oil and natural gas accounting for a low proportion in the power supply structure. Although China’s dependence on foreign oil and gas has long been high, oil and gas production are both expected to reach new highs by 2025. More importantly, oil transported through the Strait of Hormuz accounts for only about 6.6% of China’s total energy consumption, while natural gas accounts for only 0.6%, which somewhat weakens China’s reliance on Middle Eastern energy routes.

However, while energy supply security has not been fundamentally impacted, the rise in international oil and gas prices will still have an imported impact on China. As one of the world’s largest oil and gas consumers, rising oil and gas prices will push up operational costs in the economy, with the manufacturing sector being the first to bear the brunt. A significant rise in crude oil prices may accelerate the domestic PPI turning positive and gradually transmit to the CPI, forming potential inflationary pressures.

This round of global oil price increases has its positive side for China as well. As the world’s leading supplier of green energy equipment and new energy vehicles, fluctuations in energy prices may prompt more countries to accelerate their energy transition, increasing policy support for green energy investment and new energy vehicles. Currently, sales of new energy vehicles in China account for about half of total new car sales, and if the global market potential is released more rapidly, it is expected to further consolidate China’s leading advantage in related industries. Additionally, compared to other manufacturing countries, China’s energy system has stronger price stability, and this resilience may drive some international manufacturing orders to shift to China.

However, adverse factors also exist. Currently, downstream demand in sectors such as electronics and automobiles is generally weak. Under pressure from rising costs due to chip and oil and gas price increases, imported inflation may erode corporate profits and somewhat suppress consumption growth.

From the perspective of the international market, rising oil prices will produce a significant “spillover effect,” often triggering resonance in commodity markets, stock markets, and foreign exchange markets. Capital markets in the United States, Japan, and other countries are particularly sensitive to this, and oil price fluctuations often directly reflect on interest rate expectations, causing considerable disturbance in the financial market. In contrast, China’s economy is massive, and currently, both PPI and CPI are relatively mild. Aside from a few industries and companies facing cost pressures, this round of imported shocks is unlikely to have a substantial impact on domestic monetary policy and capital markets.

SFC

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