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

（Original title: [In-depth] After oil prices break 100: Inflation, exports, and the industrial chain—how can China play to its strengths and avoid weaknesses?）

As the conflict in the Middle East continues to escalate, international oil prices remain at high levels with increased volatility, creating a twofold impact on China’s economy. On the one hand, rising imported cost pressures squeeze the profits of downstream enterprises and residents’ purchasing power, dampening domestic demand. On the other hand, if overseas supply chains are disrupted by soaring energy costs, China could see its export share rise further, benefiting from relatively stable energy supply and a complete industrial chain.

Analysts say that in response to the most severe energy geopolitical shock since the oil crises of the 1970s, China’s domestic policies need to act simultaneously along two dimensions—short-term emergency hedging and medium-to-long-term structural resilience—so as to reduce, to the greatest extent possible, the impact of external shocks on China’s economy and the living standards of its people.

Short-term imported inflation pressure is hard to avoid

The Middle East fighting has entered its second month. Although all sides have political needs to end the conflict, the specific timeline remains unclear. Oil prices continue to run at high levels, and the world is generally facing inflation pressure.

As of April 6, the price of Brent crude was around $110 per barrel—up more than 50% from the closing price on the last trading day before the conflict (at $72.6 per barrel).

Economists point out that, from the transmission mechanism, higher oil prices directly and quickly affect China’s domestic industrial producer prices (PPI). The impact spreads along the industrial chain—from oil extraction and processing industries—to basic chemical products, intermediate goods, and ultimately terminal industrial goods. The effect on the consumer price index (CPI), however, is significantly weakened due to the longer transmission chain, declining residents’ reliance on gasoline and diesel consumption, and policy controls, among other factors.

Information from the National Development and Reform Commission shows that as of April 6, domestic gasoline prices had risen by about 2,320 yuan per ton compared with the end of 2025. Mainstream brokerages’ forecasts for March CPI and PPI indicate: CPI year-on-year is expected to rise by 1.0%–1.4%, at least 0.2 percentage points faster than the average increase in the first two months of this year; PPI year-on-year is expected to move from an average of -1.2% in the first two months to 0.3%–1.0%, achieving the first year-on-year positive growth since October 2022.

Lian Ping, Chairman of the China Chief Economist Forum, told Jiemian News that if the conflict is quickly eased in the short term (1–2 months) and international oil prices fall back from their high levels, the impact on China’s economy would be relatively small, potentially resulting only in mild, phased imported inflation. If the conflict lasts for several months or even more than a year, leading to sustained increases in international crude oil prices, it will have far-reaching effects on China’s economy and the world economy.

“Under extreme circumstances, if oil prices remain above $120 per barrel for the long term, the PPI increase could rebound to above 3%, and the CPI increase might break above 2.5%, creating a fairly clear inflation pressure,” Lian Ping said.

China Galaxy Securities also told Jiemian News that if this year’s oil price “center” stays in the range of $85–$100 per barrel, the CPI “center” would remain within 1.5%, and the impact of imported inflation on China would be relatively limited. But if oil prices rise above $120 per barrel, the CPI “center” could break upward past the 2% target threshold.

Against the backdrop of China’s continuing subdued prices, higher oil prices may, to some extent, have some positive effects—for example, breaking the self-reinforcing mechanism of deflation and boosting inflation expectations; improving the profitability of upstream energy and chemical enterprises to strengthen energy supply capacity; a rebound in prices raising nominal GDP growth and improving local government debt ratio indicators, creating more room for proactive fiscal policy; the新能源 industry gaining a new round of development opportunities, further boosting export demand for green products; and forcing the whole society to conserve energy and reduce emissions, accelerating efficiency upgrades and technical retrofits in sectors such as industry, transportation, and construction.

However, economists emphasize that imported inflation is not the demand-driven inflation policymakers expect, and it cannot fundamentally solve the problem of insufficient domestic demand.

“Real economic recovery hinges on boosting domestic demand through effective macro policies, improving firms’ and residents’ expectations, and forming a virtuous spiral of ‘wages-prices’ increasing,” Lian Ping said.

Luo Zhiheng, Chief Economist at Yuekai Securities, pointed out to Jiemian News that imported inflation has four unfavorable effects on China’s economy right now: first, it directly raises residents’ cost of living and particularly erodes the purchasing power of middle- and low-income groups; second, midstream and downstream enterprises face a dual squeeze from higher input costs for raw materials and insufficient demand at the terminal end; third, as one of the world’s main crude oil importers, China’s rising oil prices weaken the country’s terms of trade, increase pressure on foreign exchange outflows, and pose challenges to exchange-rate stability; fourth, a CPI rebound caused by supply shocks may constrain further monetary policy easing, interfering with the normal operation of macroeconomic regulation.

Luo Zhiheng also emphasized that a 2%-ish inflation target is not simply about pushing prices higher. Instead, it uses mild inflation to break the negative cycle of “low price stagnation → postponed consumption and investment → economic sluggishness,” making better business profits and sustained growth in residents’ incomes the new normal.

The crisis again highlights China’s manufacturing resilience

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

Lu Zhe, Chief Economist at Soochow Securities, said that because China has ample oil reserves and relatively lower dependence on external energy, the impact of rising oil prices on domestic manufacturing capacity is limited. Stable supply capacity will allow China to form an export substitution effect for other Asian economies, thereby increasing China’s share of exports globally.

Shan Hui, Goldman Sachs’ Chief China Economist, also noted in a report sent to Jiemian News that if demand remains strong in other parts of the world while the supply chain is severely disrupted, China’s exports could benefit. For example, in 2021, major economies implemented expansionary fiscal policies to respond to the impact of the pandemic, while supply chain disruptions such as semiconductor shortages limited production outside China. As demand for goods from outside China surged, China’s exports grew by 30% that year.

Lu Ting, Nomura China’s Chief Economist, told Jiemian News that according to Nomura’s estimates, oil and natural gas imported by China through the Strait of Hormuz account for about one-third and 16%, respectively, of total domestic consumption; energy supplied through this strait accounts for about 7.2% of China’s total energy consumption. China’s strategic petroleum reserves can cover roughly 2 to 3 months of national consumption. If one-third of oil supply is affected, strategic reserves can keep domestic oil consumption at about half a year.

For other major economies, the situation is very different. Rising oil prices and disruptions to crude oil supply chains will put economies in Southeast Asia, India, and South Korea/Japan and others—highly dependent on crude oil imports or lacking adequate crude oil reserves—into severe energy supply difficulties. This forces them to cut production capacity in crude-oil-related industrial chains, resulting in a sharp reduction in global supply of their relevant finished products.

On April 4, Nomura further pointed out in a report sent to Jiemian News that although the current Middle East conflict is indeed affecting China’s energy imports, the unique structure of China’s power system means domestic manufacturing is almost unaffected by large fluctuations in oil and gas prices. Therefore, this crisis may further strengthen China’s manufacturing advantage.

In the report, Lu Ting said that even today, coal remains the pillar of China’s power system. In 2024, coal-fired power accounted for about 58%; followed by renewable energy such as hydropower, wind power, and solar power, at around 34%; natural gas accounted for about 3.2%, and oil for less than 1%. Moreover, most imported natural gas comes from Russia and Central Asia. In addition, China’s power supply is subject to strict government regulation; administrative wholesale price caps and retail electricity price controls further isolate end-user electricity prices from fluctuations in international bulk commodities.

“Overall, China’s manufacturing benefits from abundant, low-cost, stable electricity supply and is basically decoupled from the global LNG and oil markets in the short to medium term. Competitors that adopt marginal pricing mechanisms and lack domestic fuel substitution options cannot replicate this stability,” Lu Ting said.

However, if the global energy crisis continues to worsen and spreads more extensively to external demand, it will ultimately also lead to a decline in China’s exports.

The China Finance 40 Forum believes that for China, the biggest risk lies in the secondary macroeconomic shock caused by a long-term closure of the Strait of Hormuz—high oil prices would weaken global economic growth and external demand.

According to a Goldman Sachs study, for every 10% increase in oil prices, global GDP growth would fall by 0.1 percentage points. According to estimates by JPMorgan Chase, if Brent crude prices remain around $100 per barrel by mid-year and gradually decline to $80 per barrel in the third and fourth quarters, global inflation this year would rise by 0.8 percentage points and GDP growth would fall by 0.6 percentage points.

Xing Ziqiang, Chief Economist for China at Morgan Stanley, pointed out that during this round of energy storm, Asian economies outside China have the greatest risk of stagflation, followed by Europe; the United States and China are relatively more stable. China’s manufacturing sector and energy transition give it resilience, but the risks of export downside pressure driven by weakening global demand and the erosion of profits for domestic enterprises and residents from imported inflation should not be underestimated.

Comprehensive measures on multiple fronts

In response to the current energy conflict, economists advocate a multi-pronged comprehensive approach: strengthen market regulation in the short term to stabilize supply and prices, while also improving support for people’s livelihoods to ease the transmission pressure of energy costs onto residents’ daily lives. In the medium to long term, China needs to accelerate industrial transformation and deepen international cooperation to improve competitiveness.

In the short term, the main response measures are to strengthen market regulation and support for people’s livelihoods.

Lian Ping recommends improving the refined petroleum product pricing mechanism, setting daily, weekly, and monthly warning lines, and flexibly adjusting the timing and pace of price adjustments. He also suggests dynamically releasing crude oil reserves: when oil prices rise to $100 per barrel, coordinate and jointly deploy commercial reserves together with the national strategic reserve supply; when prices enter extreme ranges above $130 per barrel, in addition to large-scale coordinated release of reserves, if necessary, coordinate with the International Energy Agency to release oil.

To mitigate the impact of high oil prices on enterprises, Lian Ping and Liu Zikuo, a professor at the School of Economics at Fudan University, told Jiemian News that they suggest implementing staged tax cuts and fee reductions for sectors such as civil aviation, public transportation, agriculture, and chemicals to reduce the burden on enterprises and consumers. Lian Ping also suggested temporary electricity price incentives for fertilizer production, establishing a potassium fertilizer import reserve system to prevent the rapid transmission of agricultural input prices to prices of agricultural products and food; and providing targeted subsidies to highly exposed groups such as ride-hailing drivers and freight transportation practitioners.

For residents, Lian Ping and Luo Zhiheng said they would focus on middle- and low-income groups and, if necessary, implement targeted subsidies. Luo Zhiheng noted that higher energy and food prices have a regressive effect, hitting middle- and low-income households more. He recommends raising the minimum living allowance standard, issuing price subsidies or consumption vouchers to both protect livelihoods and promote consumption.

In addition, Luo Zhiheng emphasized that in the face of a one-off energy supply shock, monetary policy should not tighten blindly. The main contradiction remains insufficient effective demand. The authorities should keep liquidity ample, support social aggregate financing costs staying at low levels, and focus on supporting expanded domestic demand, technological innovation, and small and medium-sized enterprises. Xing Ziqiang suggested that based on the degree of impact from global oil prices and external demand, the country should appropriately expand fiscal support again this year to boost terminal demand.

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

On industrial transformation, Liu Zikuo said that efforts should further accelerate the low-carbon transformation of high energy-consuming industries, push sectors such as chemicals to shift from crude oil to renewable energy replacements, improve energy efficiency, and reduce the impact of oil price fluctuations.

Lian Ping suggested setting unit output energy consumption reduction targets for steel, chemicals, building materials, and other sectors; using carbon trading to force technological upgrades; promoting waste heat recovery and electric furnace short-process steelmaking; and at the same time further cultivating new energy industry chains and establishing special funds to support energy storage R&D such as flow batteries and solid-state batteries. He also suggested encouraging new energy vehicles to go to rural areas and expanding coverage of charging facilities in county-level areas.

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

In addition, Lian Ping suggested vigorously developing the market for crude oil futures derivatives to enhance the international influence of “Shanghai prices”; enriching instruments such as crude oil options, over-the-counter swaps, and crack/spread hedges to provide precise risk-hedging tools for refining and petrochemical companies, trading firms, and airlines; relying on the BRICS mechanism and the Shanghai Cooperation Organisation to expand the scale of RMB settlement with oil-producing countries; and in the G20 and the International Energy Forum, advocating the establishment of an “emergency supply alliance.”