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The blockade in the Strait of Hormuz is creating cost-push inflation in China, as rising energy and petrochemical prices eat into manufacturing profit margins. This economic pressure undermines Beijing's efforts to stimulate domestic consumption, creating a difficult stagflationary environment.
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The push for conflict with Iran wasn't just about nuclear threats but a calculated move. By controlling the Strait of Hormuz, the US could cut off China's primary oil source, forcing them into economic concessions and shoring up the US dollar.
The recent conflicts in Iran and Venezuela can be framed as a covert economic war against China. Since China buys 90% of Iran's oil and relies on Venezuela's supply, US actions disrupting these nations directly target China's energy security and serve as a tool of economic containment.
The war in Iran is choking the Strait of Hormuz, which handles 20% of global oil. This disruption impacts nearly three times more oil volume than Russia's exports at the start of the Ukraine war, posing a significantly larger threat to the global economy and inflation.
Even a brief closure of the Strait of Hormuz has immediate, lasting effects. Shutting in millions of barrels of oil and LNG damages production facilities, which can take over 60 days to bring back online, ensuring a recession even if the conflict ends quickly.
Energy disruptions in the Strait of Hormuz create a cascade effect far beyond fuel prices. The resulting shortages impact petrochemical and fertilizer production, threatening key inputs for everything from manufacturing and electronics to agriculture and basic services like cooking gas for restaurants.
The ongoing conflict has taken 10% of global oil production offline, a supply disruption of a magnitude unseen by economists in at least 20 years. This is a pure supply-side shock, distinct from demand-side shocks like COVID, creating unique and severe inflationary pressures for the global economy.
Unlike Western economies facing severe inflationary threats from the Iran oil crisis, China is in a better position. A slight rise in inflation could actually be beneficial for its economy, helping to counteract recent deflationary pressures without alarming its central bank, the PBOC.
The inflationary impact from the Middle East war will persist well beyond initial gasoline price hikes. Secondary effects on airline fares, diesel fuel, transportation, and agricultural inputs will continue for months, eventually causing an acceleration in core CPI, not just the headline figure.
China's extreme reliance on oil from Iran and Venezuela (20% of domestic consumption) makes it the party most hurt by the conflict. This gives the US leverage, pressuring Xi Jinping to negotiate a resolution to secure China's energy supply and stabilize its economy.
The ongoing war in the Middle East, particularly its impact on energy prices via potential disruptions like the closure of the Strait of Hormuz, is now the primary factor shaping the global macro outlook. This negative supply shock significantly increases the probability of a global recession.
