Can the Middle East conflict impact oil prices, and can China's exports turn the crisis into an opportunity?

Ask AI · How does the rise in oil prices affect China’s export “U-shaped” trend?

Reporter Wang Zhen

Since the outbreak of the U.S.-Iran conflict at the end of February, the Strait of Hormuz has been in a de facto blockade situation; key energy infrastructure in the Middle East has been damaged and forced to reduce or suspend production, causing international crude oil prices to surge dramatically. As the fundamental energy source at the base of industrial production and an important energy source for international freight, higher crude oil prices will inevitably create significant shocks to production and foreign trade in countries around the world.

In January and February this year, China’s exports grew by 21.8% year on year in U.S. dollar terms. China is the world’s largest crude oil importer, relying on imports for more than 70%, about half of which comes from the Middle East. With oil prices skyrocketing, what will become of China’s exports?

In response, analysts believe that in the short term, the impact on China’s exports depends on overseas supply and demand conditions. In the medium to long term, the Middle East conflict will drive the world to accelerate its transition to renewable energy, and China’s exports are expected to benefit from this.

Goldman Sachs analyzed the impact of rising oil prices on China’s exports from the perspective of overseas supply and demand. In a report sent to Jiemian News, Goldman Sachs stated that if demand outside China weakens significantly while industrial capacity remains unchanged, China’s exports and growth could face substantial pressure—for example, during the 2009 global financial crisis, China’s exports fell by 16%. It is worth noting that many low-income emerging economies lack large-scale oil inventories and also lack the ability to provide massive fiscal subsidies to protect households and businesses from rising energy costs. In the past few years, emerging markets have been the main driver of China’s export growth. Slowing growth among emerging-market trade partners may weigh on China’s exports to these countries in the coming quarters.

Conversely, Goldman Sachs believes that if demand in other parts of the world remains strong while supply chains are severely disrupted, China’s exports and growth could benefit. For example, in 2021, economies around the world implemented fiscal expansion policies to respond to the shock from the pandemic. Meanwhile, supply-chain disruptions such as semiconductor shortages limited production outside China, causing a surge in external demand for Chinese goods and driving 30% export growth in China that year.

Lu Zhe, Chief Economist at Dongwu Securities, pointed out that, under certain assumptions, rising crude oil prices have a “U-shaped” impact on China’s exports. According to his calculations, when oil prices are at $80 per barrel or $120 per barrel, China’s export growth rate in 2026 is about 1%; while when oil prices are at $100 per barrel, exports may see slight negative growth.

Lu Zhe emphasized that because China has ample crude oil reserves, and its reliance on external energy has clearly decreased in recent years, even if rising oil prices lead to a contraction in global trade, the shock China faces will be noticeably smaller than that faced by other economies.

He explained that China’s export value can be decomposed into global total exports multiplied by China’s share of global exports. From a global level, the negative impact of rising oil prices on global trade demand will cause the total value of global exports to fall. However, from the perspective of share, because China has ample crude oil reserves and lower reliance on external energy, the impact of rising oil prices on China’s manufacturing capacity is relatively limited. With stable supply capacity, China will form export substitution for other Asian economies, bringing an increase in China’s share of global exports.

In the medium to long term, Goldman Sachs said there are solid reasons to believe that the current Middle East conflict may benefit China’s exports. Analysts from Goldman Sachs told Jiemian News that the recent experience of soaring energy prices and fuel shortages—combined with heightened geopolitical uncertainty—may prompt more countries to prioritize energy security. Specific steps could include building nuclear power plants, increasing installed capacity for renewable energy, accelerating the rollout and adoption of electric vehicles, and further promoting the electrification of the economy. Since China is leading in many of the above areas, it is therefore bound to benefit from this global shift. Between 2019 and 2025, China’s production of electric vehicles, photovoltaic cells, and power generation equipment increased by 240%, 340%, and 1080%, respectively. The latest “Fifth Plenary Session of the 15th CPC Central Committee” plan—i.e., the “Fifteen-Five” plan—shows that decision-makers still place very high importance on technological innovation and manufacturing competitiveness, while also boosting consumption in a step-by-step manner. China may further adjust resource allocation, consolidate its leading advantages in development and manufacturing of key products that help other countries pursue energy security, and thereby drive strong growth in exports.

In addition to exports, the impact of rising oil prices on China’s prices and GDP is also drawing attention. Zhang Di, Chief Macro Analyst at China Galaxy Securities, found through historical data regression and input-output analysis that the elasticity coefficient of oil prices on China’s Consumer Price Index (CPI) is about 1~2%, and that the elasticity coefficient on the Producer Price Index (PPI) is about 5~6%.

Zhang Di told Jiemian News that assuming the oil price’s annual midpoint this year is $85~100 per barrel, the CPI’s midpoint would still be within 1.5%, meaning the pressure from imported inflation on China would be relatively limited. However, if oil prices rise above $120 per barrel, the CPI midpoint could break upward through the 2% target threshold.

Analysts point out that China’s economy is currently at a relatively low level of prices. An appropriate rebound is certainly beneficial, but it is necessary to watch out for cost-push inflation driven by geopolitical conflicts—such inflation could squeeze corporate profits and increase living costs for residents, so prevention should be in place in advance.

To address the challenges brought by rising oil prices, Luo Zhiheng, Chief Economist at Yuekai Securities, suggested coordinated efforts from three aspects: first, strengthen energy security from the supply side to smooth the impact of international oil price fluctuations on the domestic market. This includes flexibly using strategic petroleum reserves and releasing them to the market at appropriate times when oil prices spike sharply; accelerating the diversification of energy import sources and the development of alternative energy, expanding energy cooperation with regions including Russia, Central Asia, Africa, and South America; speeding up the installation of wind power and photovoltaic new energy and building energy storage; promoting electrification and substitution in the transportation sector to reduce the economy’s sensitivity to shocks from international oil prices.

Second, provide targeted relief and subsidies for enterprises and residents. Luo Zhiheng noted that the impact of rising oil prices on industries such as transportation, logistics, downstream chemicals, and agriculture is the most direct. Consider temporarily reducing or exempting some tax burdens for these industries, or help enterprises through periods of high costs by means such as special subsidies and loan interest rebates. In addition, increases in energy and food prices have a pronounced regressive effect, with the largest impact on low-income households. Measures such as raising the minimum living allowance standard, issuing one-time price subsidies or consumption vouchers can safeguard the bottom line of people’s livelihoods while also enabling faster conversion of funds into consumption demand through groups with a higher marginal propensity to consume.

Third, keep strategic resolve in macro policies, focus on core CPI and the output gap, and strengthen expectation management. Luo Zhiheng emphasized that in the face of supply shocks such as rising oil prices, as long as the shock is one-off and does not trigger a “wage-price” spiral, monetary policy should not respond by tightening. Currently, the main contradiction facing China’s economy is insufficient effective demand. The main task of monetary policy is still to maintain ample liquidity, keep society’s overall comprehensive financing cost at a low level, and step up support for key areas such as expanding domestic demand, technological innovation, and small and micro enterprises.