Although rising energy costs are putting new pressure on China’s industrial sector, China has so far avoided major supply disruptions related to ongoing tensions in the Middle East, trade credit insurance expert Coface said.
China is in a better position to withstand long-term instability in the region than many other Asian economies, Coface said in a new analysis. Although 35% of China’s oil imports pass through the Strait of Hormuz, the company said the risk of immediate physical shortages remained relatively low.
Coface attributes this resilience to China’s domestic energy mix, which remains heavily reliant on coal. Oil and natural gas together account for 39% of China’s final energy consumption, well below the global average of 62%.
The company also highlighted China’s vast strategic oil reserves, which it said could cover nearly 100 days of net imports if supply routes were temporarily disrupted.
Cofas said that despite stable supplies, the financial impact of rising energy and chemical prices on the economy as a whole was becoming increasingly clear. In March, China’s industrial producer prices rose 0.5% year-on-year, the first year-on-year increase in more than three years. Coface said the petrochemical industry is one of the main drivers of growth.
The company said that as consumer demand remains weak, most of the additional cost burden is currently being borne by businesses further down the supply chain. Consumer inflation has remained relatively restrained, supported by fuel price controls, growing penetration of electric vehicles and government support for state-owned refineries.
Coface warned that higher operating costs are starting to squeeze profit margins, especially in industries such as textiles, chemicals and synthetic fibers, where some manufacturers have reduced production levels. The company added that tighter regulations and higher compliance fees were adding to pressure on the company.
Coface said smaller businesses may face the biggest challenge because they are less able to pass on rising costs to customers. Larger companies are considered to be in a more stable position due to stronger financial positions, economies of scale and long-term supply agreements.
Coface also said the current situation could improve China’s competitive position relative to other Asian economies, including India and several ASEAN countries, which are more vulnerable to energy price swings. The crisis has also accelerated international demand for Chinese green technologies, including electric vehicles, battery systems and solar products, the company said.
However, Coface warned that protracted conflict and continued increases in energy prices could weaken global economic activity. The company estimates that if energy prices double from pre-war levels, global economic growth could fall by more than 1% in 2026, reducing demand for Chinese exports.
Tan Junyu, Economist at Coface North Asia, commented: “Thanks to its energy mix and industrial ecosystem, China is currently managing to avoid major supply shocks. But the continued rise in costs is creating a new vulnerability: profit margins, especially for those companies most at risk and least able to pass on price increases.”
