After oil prices surpass $100: inflation, exports, supply chains—how will China leverage its strengths and avoid weaknesses?

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【In-depth】After oil prices surpass $100: inflation, exports, supply chains—how can China play to its strengths and avoid weaknesses?

Reporter Wang Zhen

Currently, the ongoing escalation of conflicts in the Middle East and the sustained high volatility of international oil prices are exerting a dual impact on China’s economy: on one hand, rising import costs squeeze profits of domestic downstream companies and reduce residents’ real purchasing power, suppressing domestic demand; on the other hand, if overseas supply chains are hindered by soaring energy costs, China’s relatively stable energy supply and complete industrial chain could enable its export share to further increase.

Analysts point out that, in the face of the most severe energy geopolitical shocks since the 1970s oil crisis, domestic policy must simultaneously address short-term emergency hedging and long-term structural resilience, to minimize external shocks’ impact on China’s economy and people’s livelihoods.

Short-term import-driven inflationary pressure is unavoidable

The conflict in the Middle East has entered its second month. Although all parties have political demands to end the conflict, the specific timeline remains uncertain. Oil prices continue to stay high, and global inflationary pressures are widespread.

As of April 6, Brent crude oil was about $110 per barrel, over 50% higher than the last trading day before the conflict (at $72.6 per barrel).

Economists note that, from a transmission perspective, the impact of rising oil prices on the domestic Producer Price Index (PPI) is direct and rapid, spreading along the industrial chain from oil extraction and processing industries to basic chemicals, intermediate goods, and end products; the effect on the Consumer Price Index (CPI) is significantly weakened due to the longer transmission chain, reduced reliance on refined oil consumption by residents, and policy regulation factors.

According to information from the National Development and Reform Commission, as of April 6, domestic gasoline prices increased by about 2,320 yuan per ton compared to the end of 2025. Mainstream securities firms forecast that the March CPI and PPI will grow by 1.0%–1.4% year-on-year, at least 0.2 percentage points faster than the average of the first two months of this year; PPI is expected to shift from an average of -1.2% in the first two months to 0.3%–1.0%, marking the first year-on-year growth since October 2022.

Lian Ping, Chairman of the China Chief Economist Forum, told Jiemian News that if the conflict eases quickly (within 1-2 months), causing international oil prices to fall from their high levels, China’s economy would be less affected, possibly only facing a phase of mild import-driven inflation. However, if the conflict persists for months or even over a year, leading to sustained increases in global crude oil prices, it will have profound impacts on China’s and the global economy.

“Under extreme circumstances, if oil prices stay above $120 per barrel for a long time, PPI growth could rise above 3%, and CPI could break through 2.5%, creating noticeable inflationary pressure,” said Lian Ping.

China Galaxy Securities also told Jiemian News that if the annual oil price center remains between $85 and $100 per barrel, the corresponding CPI center would stay within 1.5%, and import-driven inflation’s impact on China would be relatively limited. But if oil prices exceed $120 per barrel, the CPI center could surpass the 2% threshold.

Against the backdrop of persistently low domestic prices, rising oil prices may bring some positive effects, such as breaking the self-reinforcing deflation, boosting inflation expectations; improving profitability of upstream energy and chemical companies, which could enhance energy supply; raising nominal GDP growth, improving local government debt indicators, and providing more room for proactive fiscal policies; ushering in new opportunities for the renewable energy industry, further boosting exports of green products; and forcing society to save energy and reduce consumption, accelerating energy efficiency improvements and technological upgrades in industries, transportation, and construction.

However, economists emphasize that import-driven inflation is not demand-pull inflation expected from policy, and it cannot fundamentally solve the domestic demand deficiency.

“True economic recovery depends on effectively boosting domestic demand through macro policies, improving business and consumer expectations, and forming a benign ‘wage-price’ spiral,” Lian Ping said.

Yuekai Securities Chief Economist Luo Zhiheng told Jiemian News that import-driven inflation currently has four adverse effects on China’s economy: first, it directly raises residents’ living costs, especially eroding the purchasing power of low- and middle-income groups; second, it exerts dual pressure on downstream companies from rising raw material costs and weak terminal demand; third, as one of the world’s major oil importers, rising oil prices weaken China’s trade conditions and increase foreign exchange outflows, challenging exchange rate stability; fourth, supply shocks causing CPI to rise may constrain further easing of monetary policy and interfere with macro regulation.

Luo Zhiheng also stressed that the 2% inflation target is not simply about raising prices but about breaking the negative cycle of “low prices → delayed consumption and investment → sluggish economy” through moderate inflation, enabling sustainable improvements in corporate profits and household incomes.

The crisis again highlights China’s manufacturing resilience

On the other hand, sustained high oil prices could be an opportunity for China’s exports.

Dongwu Securities Chief Economist Lu Zhe pointed out that, thanks to China’s ample oil reserves and relatively low dependence on external energy, the impact of rising oil prices on domestic manufacturing capacity is limited. Stable supply capacity will allow China to replace some Asian economies in exports, increasing China’s share of global exports.

Goldman Sachs Chief China Economist Shanfui also mentioned in a report to Jiemian News that if demand remains strong in other regions and supply chains are severely disrupted, China’s exports could benefit. For example, in 2021, as major economies implemented expansionary fiscal policies to counter pandemic shocks, and supply chain disruptions like semiconductor shortages limited production outside China, external demand for Chinese goods surged, driving a 30% export growth that year.

Nomura’s Chief Economist for China, Lu Ting, told Jiemian News that, according to Nomura’s estimates, China’s imports of oil and natural gas through the Strait of Hormuz account for about one-third and 16% of total domestic consumption, respectively; energy supplied via this strait makes up about 7.2% of China’s total energy consumption. China’s strategic oil reserves can meet about 2 to 3 months of national demand, and if one-third of oil supplies are affected, reserves could sustain domestic consumption for about half a year.

For other major economies, the situation is quite different. Rising oil prices and disruptions in the oil supply chain could cause energy supply crises for ASEAN, India, Japan, South Korea, and other heavily dependent or under-resourced oil-importing economies, forcing them to shrink their oil-related industries and significantly reduce their supply of related products globally.

On April 4, Nomura further pointed out in a report to Jiemian News that, although the current Middle East conflict does impact China’s energy imports, China’s unique power grid structure makes its manufacturing sector almost unaffected by large fluctuations in oil and gas prices. Therefore, this crisis might further strengthen China’s manufacturing advantages.

Lu Ting stated in the report that, to date, coal remains the backbone of China’s power system. In 2024, coal-fired power accounts for about 58%; followed by hydropower, wind, and solar energy, about 34%; natural gas about 3.2%, and oil less than 1%, with most imported natural gas coming from Russia and Central Asia. China’s power supply is strictly regulated by the government, with administrative caps on wholesale and retail electricity prices, further isolating end-user electricity prices from international commodity fluctuations.

“Overall, China’s manufacturing benefits from abundant, low-cost, and stable electricity supply, remaining largely decoupled from global LNG and oil markets in the short to medium term. Competitors relying on marginal pricing mechanisms and lacking domestic fuel alternatives cannot replicate this stability,” Lu Ting said.

However, if the global energy crisis worsens and external demand is further affected, China’s exports could eventually decline.

The China Fintech Research Institute believes that the greatest risk for China is the long-term closure of the Strait of Hormuz, which could trigger secondary macroeconomic shocks—rising oil prices would weaken global economic growth and external demand.

According to Goldman Sachs research, every $10 increase in oil prices could reduce global GDP growth by 0.1 percentage points. Meanwhile, JPMorgan estimates that if Brent crude remains around $100 per barrel until mid-year and gradually declines to $80 in Q3 and Q4, global inflation could rise by 0.8 percentage points, and GDP growth could slow by 0.6 percentage points.

Morgan Stanley’s Chief China Economist Xing Ziqiang pointed out that, in this energy storm, apart from China, the greatest risk of stagflation is faced by other Asian economies, followed by Europe, with the US and China relatively stable. China’s manufacturing and energy transition give it resilience, but the weak global demand and import-driven inflation still pose downward pressure on exports and profits for domestic companies and residents.

Multi-pronged comprehensive measures

In response to the current energy conflict, economists advocate adopting a multi-pronged comprehensive strategy: in the short term, strengthen market regulation to stabilize supply and prices, while ensuring livelihood security to ease the transmission of energy costs to residents; in the medium to long term, accelerate industrial transformation and deepen international cooperation to enhance competitiveness.

In the short term, key measures include strengthening market regulation and social safety nets.

Lian Ping suggests improving refined oil pricing mechanisms, setting daily, weekly, and monthly warning thresholds, and flexibly adjusting pricing cycles; dynamically releasing crude oil reserves, coordinating with commercial reserves when prices reach $100 per barrel, and jointly releasing national strategic reserves when prices exceed $130 per barrel, including large-scale reserve releases and, if necessary, coordinated releases with IEA.

To mitigate the impact of high oil prices on enterprises, Lian Ping and Fudan University Professor Liu Zhiku both recommend phased tax cuts and fee reductions in sectors like civil aviation, public transportation, agriculture, and chemicals. Lian Ping also suggests temporary electricity price discounts for fertilizer production, establishing potassium fertilizer import reserves to prevent rapid pass-through of input costs to food prices, and targeted subsidies for ride-hailing drivers and freight operators.

For residents, Lian Ping and Luo Zhiheng emphasize focusing on low- and middle-income groups, implementing targeted subsidies if needed. Luo Zhiheng pointed out that rising energy and food prices have regressive effects, impacting low-income households more, and recommends raising minimum living standards, providing price subsidies or consumer vouchers to both protect livelihoods and stimulate consumption.

Additionally, Luo Zhiheng stressed that monetary policy should not blindly tighten in response to a one-time energy supply shock. The main current challenge remains weak effective demand, so liquidity should be kept ample, and social financing costs kept low, to support expanding domestic demand, technological innovation, and small- and micro-enterprises. Xing Ziqiang suggested that, depending on the impact of global oil prices and external demand, fiscal support could be expanded again this year to boost end-user demand.

In the medium to long term, the main strategies are accelerating industrial transformation and deepening international cooperation.

On industrial transformation, Liu Zhiku said that further speeding up low-carbon transformation in high-energy-consuming industries, promoting the shift from oil to renewable energy in chemical sectors, improving energy efficiency, and reducing the impact of oil price fluctuations.

Lian Ping recommends setting energy consumption reduction targets per unit of output for steel, chemicals, and building materials, using carbon trading to push for technological upgrades, promoting waste heat recovery and electric arc short-process steelmaking; further developing the renewable energy industry chain, establishing special funds for energy storage R&D such as flow and solid-state batteries; encouraging electric vehicles to go rural areas, and expanding charging infrastructure in counties.

Regarding international cooperation, economists all mention expanding diversified energy import channels, strengthening cooperation with Russia, Central Asia, Africa, and Latin America to disperse geopolitical risks.

Additionally, Lian Ping suggests vigorously developing crude oil futures derivatives markets, enhancing the international influence of “Shanghai prices,” enriching risk management tools like options, OTC swaps, and spread hedging for refining, trade, and aviation companies; leveraging BRICS mechanisms and SCO to expand RMB settlement with oil-producing countries; and advocating for the establishment of an “emergency supply alliance” at G20 and the International Energy Forum.