China is vulnerable to a prolonged closure of the Strait of Hormuz — despite its leaders’ insistence to the contrary — because of the knock-on effects on its export markets, a leading analyst argued.
China is the world’s largest importer of oil and gas, with about half its crude oil imports, and roughly 30% of its natural gas imports coming from Persian Gulf suppliers who must ship through the Strait of Hormuz. And yet, at least so far, Beijing seems to be taking Iran’s closure of the strait in stride.
At the China Development Forum in Beijing this week, Chinese leaders denounced the US and Israel for attacking Iran, a country with which China has forged strong diplomatic ties and inked a wide-ranging economic cooperation pact in 2021. But they dismissed concerns that a prolonged closure of the strait might pose a threat to the world’s second-largest economy.
Alicia García-Herrero, Taipei-based chief economist for French investment bank Natixis, concurred that China’s economy is resilient to energy shocks in the short-term — because of its ample strategic and commercial energy reserves and Iran’s willingness to allow ships carrying discounted oil to China safe passage through the strait.
But she warned that if the conflict drags on for months instead of weeks, China’s economy will be uniquely vulnerable because of its dependence on exports, particularly to Southeast Asia and Europe. The two regions, she estimated, absorb 15% and 13% of China’s exports respectively, have scant energy reserves, and would be devastated by a protracted spike in oil prices.
“For China, the main threat from the Iran conflict is that it could retard consumption globally, with obvious consequences for Chinese exports,” García-Herrero wrote in a recent Bruegel essay.
“It all depends on what happens with global demand,” she told Semafor in an interview.
“If this is just an inflation shock and governments support consumption with subsidies, China will be fine… But if we’re looking at a global recession, and governments are afraid to support consumption — and most of them don’t feel they have fiscal flexibility to do that — China has more to lose than anybody else.”
Officially, China has about 95 days’ worth of oil reserves — that figure is closer to 115 or 120 days, or just about half of Japan’s capacity, once you take into account Beijing’s commercial reserves. China also spent the months of January and February stockpiling fuel, and may hold additional reserves offshore.
Meanwhile, Beijing continues to receive discounted Iranian oil. Tehran is still able to export at least 1.5 million barrels per day, García-Herrero noted, meaning that China is getting around 50-70% of its pre-war imports.