After oil prices surpass $100: Inflation, exports, and the industrial chain—how China can leverage strengths and avoid weaknesses

Ask AI · Why Can China’s Manufacturing Stay Resilient During an Energy Crisis?

Reporter Wang Zhen

The conflict in the Middle East continues to intensify. International oil prices remain high and volatility has increased, creating a dual impact on China’s economy. On the one hand, rising input costs squeeze the profits of downstream enterprises and residents’ real purchasing power, suppressing domestic demand. On the other hand, if overseas supply chains are disrupted due to soaring energy costs, China—backed by relatively stable energy supply and a complete industrial chain—may see its export share rise further.

Analysts say that, when facing the most severe energy geopolitical shock since the oil crises of the 1970s, China’s domestic policymaking should act simultaneously on two dimensions: short-term emergency countermeasures and long-term structural resilience, to minimize the impact of external shocks on China’s economy and people’s livelihoods.

Short-term imported inflation pressure is hard to avoid

The fighting in the Middle East has entered its second month. Although all sides have political demands to end the conflict, the specific timing remains unclear, and oil prices continue to operate at high levels, with inflation pressure broadly felt worldwide.

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

Economists point out that, in terms of transmission logic, higher oil prices directly and quickly shock China’s Producer Price Index (PPI) for industrial goods, spreading along the industrial chain—from oil extraction and processing industries—to basic chemical products, intermediate goods, and then to end industrial goods. The impact on the Consumer Price Index (CPI) is significantly weakened because the transmission chain is long, residents’ reliance on finished petroleum product consumption declines, and factors such as policy regulation come into play.

Information from the National Development and Reform Commission shows that as of April 6, domestic gasoline prices had risen by about 2320 yuan per ton compared with the end of 2025. Mainstream brokerages’ forecasts for March CPI and PPI show: CPI year on year is expected to increase by 1.0%–1.4%, at least 0.2 percentage points faster than the average increase in the first two months of this year. For PPI, year on year could move from the average of -1.2% in the first two months to 0.3%-1.0%, achieving the first year-on-year increase since October 2022.

Lian Ping, Chairman of the Board of the China Chief Economist Forum, told Interface News that if the conflict rapidly eases in the short term (1–2 months) and international oil prices fall back from their highs, the impact on China’s economy would be relatively small, and it might face only stage-like mild imported inflation. If the conflict continues for several months or even more than 1 year and international crude oil prices stay high for a sustained period, it will have far-reaching effects on China’s economy and the world economy.

“In extreme cases, if oil prices remain above $120 per barrel for a long time, the PPI increase could rebound to more than 3%, and the CPI increase might break through 2.5%, creating relatively evident inflation pressure.” Lian Ping said.

China Galaxy Securities also told Interface News that if the oil price center for the full year stays in the range of $85–$100 per barrel, the CPI center would still remain within 1.5%, meaning the impact of imported inflation on China would be relatively limited. But if oil prices move up beyond $120 per barrel, the CPI center could rise above the 2% target threshold.

Against the backdrop of China’s persistent low price environment, higher oil prices may, to some extent, have some positive effects—for example, breaking the self-reinforcing cycle of deflation and raising inflation expectations; improving the profitability of upstream enterprises such as energy and chemical firms, which helps strengthen energy supply; a rebound in prices lifting nominal GDP growth and improving local governments’ debt-ratio indicators, providing more room for proactive fiscal policy; the new round of development opportunities for the new energy industry, further boosting export demand for green products; and forcing the whole society to save energy and reduce emissions, accelerating efficiency improvements and technological upgrades in areas such as industry, transportation, and construction.

However, economists emphasize that imported inflation is not demand-driven inflation that policy expectations aim for, and it cannot fundamentally solve the problem of insufficient domestic demand.

“Real economic recovery hinges on boosting domestic demand through effective macro policies, improving business and residents’ expectations, and forming a virtuous spiral of ‘wage-price’ increases.” Lian Ping said.

Luo Zhiheng, Chief Economist at Yuekai Securities, pointed out to Interface News that imported inflation has four adverse effects on China’s economy at present: first, it directly increases residents’ cost of living, with particularly significant erosion of the real purchasing power of middle- and low-income groups; second, midstream and downstream enterprises face dual pressure from rising input material prices and insufficient terminal demand; third, as one of the world’s most important crude oil importers, China’s oil price increases will weaken China’s terms of trade, increase pressure for foreign-exchange outflows, and pose a challenge 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 control.

Luo Zhiheng also emphasized that a 2%-ish inflation target is not simply about pushing up prices; rather, through mild inflation, it breaks the negative cycle of “low price levels → delayed consumption and investment → economic weakness,” so that improvements in corporate profits and growth in residents’ income become a sustainable norm.

The crisis once again highlights China’s manufacturing resilience

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

Lu Zhe, Chief Economist at Soochow Securities, said that because China has ample crude oil reserves and relatively low dependence on external energy, higher oil prices have limited impact on China’s manufacturing industry capacity. Stable supply capability will allow China to form export substitution for other Asian economies, thereby increasing China’s share of exports in the global market.

Zhan Hui, Goldman Sachs’ Chief China Economist, also mentioned in a report sent to Interface News that if demand in other global regions remains strong while supply chains are severely disrupted, China’s exports could benefit. For example, in 2021, major economies implemented expansionary fiscal policies to respond to the shock from the pandemic, while supply-chain disruptions such as semiconductor shortages limited production outside China. Surging external demand for Chinese goods drove a 30% year-on-year increase in China’s exports that year.

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

For other major economies, the situation is very different. Higher oil prices and breaks in crude oil supply chains will put economies such as ASEAN, India, and South Korea/Japan—highly dependent on crude oil imports or lacking sufficient crude oil reserves—into severe energy supply dilemmas, forcing them to contract production capacity across crude-oil-related industrial chains and leading to a large reduction in the global supply of their relevant finished products.

On April 4, Nomura further pointed out in a report sent to Interface News that although the current Middle East conflict indeed affects China’s energy imports, the unique structure of China’s power system means China’s manufacturing industry 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 stated that up to now, coal remains the pillar of China’s power system. In 2024, the share of coal-fired power generation is around 58%; next are renewable energy sources such as hydropower, wind power, and solar power, at about 34%. Natural gas accounts for about 3.2%, and oil accounts for less than 1%. In addition, most imported natural gas comes from Russia and Central Asia. Furthermore, 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 sufficient, low-cost, and stable electricity supply. In the short to medium term, it is basically decoupled from the global LNG and oil markets. Competitors that adopt marginal pricing mechanisms and lack domestic fuel substitution options cannot replicate this kind of stability.” Lu Ting said.

However, if the global energy crisis worsens and spreads more heavily to external demand, China’s exports will ultimately also decline.

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

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

China’s chief economist at Morgan Stanley, Xing Ziqiang, said that in this round of energy storm, among Asian economies other than China, the risk of stagflation is the highest, followed by Europe; the United States and China are relatively resilient. China’s manufacturing industry and energy transition endow it with resilience, but the downward pressure on exports stemming from weakening global demand, as well as the erosion of profits for domestic businesses and residents caused by imported inflation, should not be underestimated.

Comprehensive policy measures with multiple approaches

In response to the current energy conflict, economists advocate taking a multi-pronged comprehensive response strategy: in the short term, strengthen market regulation to stabilize supply and prices, while also doing a good job of safeguarding people’s livelihoods to ease the transmission pressure of energy costs to residents’ daily lives; in the long term, accelerate industrial transformation and deepen international cooperation to enhance competitiveness.

In the short term, the main response measures are to strengthen market regulation and safeguard 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 of price changes. He also suggests dynamically releasing crude oil reserves: when oil prices rise to $100 per barrel, coordinate the release of commercial reserves with the injection of national strategic reserves; when entering extreme ranges above $130 per barrel, besides large-scale and centralized releases of reserves, if necessary, coordinate with the International Energy Agency to release reserves jointly.

To reduce the impact of high oil prices on enterprises, Lian Ping and Liu Zikua, a professor at the School of Economics, Fudan University, both told Interface News that it is recommended to implement phased tax cuts and fee reductions in sectors such as civil aviation, public transportation, agriculture, and chemicals, to ease the burden on enterprises and consumers. Lian Ping also suggested temporary electricity price preferential treatment for fertilizer production, establishing a potassium fertilizer import reserve system to prevent the price of agricultural inputs from rising too quickly and transmitting to the prices of agricultural products and food; and providing targeted subsidies to highly dependent groups such as ride-hailing drivers and freight practitioners.

Regarding residents, Lian Ping and Luo Zhiheng said the key focus should be middle- and low-income groups, and if necessary, targeted subsidies should be implemented. Luo Zhiheng pointed out that energy and food price increases have a regressive effect and affect middle- and low-income households more. He recommended raising the minimum living allowance standard, issuing price subsidies or consumer vouchers to both protect people’s livelihoods and boost consumption.

In addition, Luo Zhiheng emphasized that when facing a one-off energy supply shock, monetary policy should not tighten blindly. The main contradiction at present is still insufficient effective demand; liquidity should remain ample, social comprehensive financing costs should stay low, and support should focus on expanding domestic demand, technological innovation, and small and micro enterprises. Xing Ziqiang suggested that, depending on how much global oil prices and external demand affect the situation, the government should appropriately expand fiscal support again this year to boost terminal demand.

From a long-term perspective, the main strategy is to accelerate industrial transformation and deepen international cooperation.

On industrial transformation, Liu Zikua said that we should further speed up the low-carbon transition for high-energy-consuming industries, promote shifts in areas such as chemicals from crude oil to renewable energy alternatives, improve energy efficiency, and reduce the impact of oil price volatility.

Lian Ping suggested setting unit output energy consumption reduction targets for steel, chemicals, and building materials, using carbon trading to force technological upgrades, and promoting measures such as waste heat recovery and electric-arc furnace short-process steelmaking. At the same time, he recommended further cultivating the new energy industry chain, setting up special funds to support energy storage R&D such as flow batteries and solid-state batteries, and encouraging new-energy vehicles to go to rural areas to expand coverage of charging infrastructure in county-level regions.

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

In addition, Lian Ping recommended vigorously developing the crude oil futures and derivatives market to enhance the international influence of the “Shanghai price”; enriching risk-hedging tools such as crude oil options, over-the-counter swaps, and crack spread hedging to provide more precise risk-hedging instruments for refining and petrochemical, trading, aviation, and other companies; relying on mechanisms such as the BRICS mechanism and the Shanghai Cooperation Organization to expand the scale of renminbi settlement with oil-producing countries (based on the BRICS mechanism and the Shanghai Cooperation Organization); and at the G20 and in the International Energy Forum, advocating the establishment of an “emergency supply alliance.”