Iran conflict prompts questions about China’s export power amid fractured supply chains
Crisis sparks debate: will it cripple global demand or show that China’s supply-side resilience, proven during pandemic, remains in place?
Mirroring the supply chain upheavals of the pandemic era, the crisis has prompted new questions about whether China will be able to leverage its industrial base and supply-side resilience if a prolonged conflict further fractures global supply chains.
“China’s economy looks strong on the surface but is structurally fragile underneath,” cautioned Alicia Garcia-Herrero, chief economist for the Asia-Pacific region at Natixis.
“If the oil shock tips the global economy into a severe downturn, export orders collapse. Chinese factories slow. Jobs are lost … a global recession would hurt China as much as anyone, and possibly more in some areas.”
At a media briefing last week, the International Monetary Fund said that every 10 per cent increase in oil prices – if sustained through the year – could trigger a 40-basis-point rise in global headline inflation and a 0.1 to 0.2 per cent contraction in global output.
Citing that estimate, Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered, said a prolonged conflict would inevitably suppress demand for Chinese exports.
However, Xu Tianchen, senior economist at the Economist Intelligence Unit, said the war was “a plus” for China’s exports in the short term, and “the key is how long the war will last”.
“The obvious risk is the war becoming endless – let’s say beyond six months,” Xu said. “In this event, global demand will no doubt shrink, and on the supply side, Chinese factories will ultimately feel the oil strain.”
China’s supply chains have only become stronger since Covid-19
Parallels are increasingly being drawn between the Iran war and the pandemic-era shock. In a column published in the South China Morning Post on Friday, Bernard Chan, vice-chairman of the West Kowloon Cultural District Authority board, said recent shifts triggered by the war “mark a decisive break in the post-pandemic recovery”.
“The outcome is not predetermined, but the crisis may mark the start of a more dangerous phase,” he added.
The question now is whether the world’s second-largest economy can again capitalise on its supply chain strengths if the Iran war drags on and continues to send crude oil and other major material prices higher.
“China’s supply chains have only become stronger since Covid-19,” Xu said, adding that if the country could secure enough energy for its factories, its exporters would “emerge as a winner”.
“But not all industries will benefit – some are also reliant on non-oil imports from the Middle East,” he added.
Ding said that unlike the pandemic, which physically halted global production lines, the current crisis was primarily a shock to costs.
“I don’t think [China’s] advantages will be as obvious as they were during the pandemic,” he said, adding that the primary impact of the crisis – surging oil and gas prices – could also affect China and pass through to its producer price index.
“If we compare China to neighbouring economies like South Korea, Japan and Taiwan, its energy security situation should be slightly better,” he said.