Hormuz blockade: China faces biggest economic blow from US move
What's the story
The United States has initiated a naval blockade in the Strait of Hormuz, targeting all shipping linked to Iranian ports. The move, announced by President Donald Trump and executed by the US Central Command on April 13, has major implications for global oil and gas flows. The strait is a critical chokepoint through which about 20% of the world's oil trade passes.
Economic impact
Crude imports and gas supplies
China, the world's largest crude oil importer, is particularly vulnerable to this blockade. The Strait of Hormuz is a key transit point for 45-50% of its crude imports and about 30% of its liquefied natural gas (LNG) shipments. This disruption could have immediate consequences for Chinese refiners and utilities that rely on Gulf suppliers such as Saudi Arabia, Iraq, the United Arab Emirates (UAE), and Qatar.
Price surge
Impact on China's industrial economy
Even before the blockade, oil markets were tightening with Brent crude nearing $120 per barrel in late March. Chinese refiners are now paying premiums of up to $40 per barrel over benchmark prices due to supply scarcity. This price hike is directly impacting China's industrial economy, where energy costs play a crucial role in transport, power generation, petrochemicals, and manufacturing sectors.
Economic ties
Broader economic ties with Middle East
China's economic exposure to the Middle East goes beyond energy flows. Since 2005, it has invested over $269 billion in the region, with Saudi Arabia receiving about $82 billion. The total trade between China and the Middle East has more than doubled since 2017 to around $317 billion in 2024. This is a stark contrast to roughly $85 billion worth of trade with the United States during the same period.
Cost increase
Rising production costs in China
The blockade is already impacting production costs across sectors in China. The producer price index (PPI) turned positive in March, rising 0.5% year-on-year due to energy-intensive industries. Sectors like petrochemicals, fertilizers, aviation, and heavy industry are vulnerable due to their reliance on oil and gas. While consumer inflation remains low at around 1% in March, the gap between producer and consumer prices suggests companies are absorbing part of the cost increase, which could affect profitability if elevated energy prices persist.
Logistics challenges
Increased freight and insurance costs
With the Strait of Hormuz disrupted, oil shipments are being rerouted through longer routes such as around Africa or via the Strait of Malacca. This increases transit time by several days and raises freight costs. Insurance costs have also skyrocketed with war-risk premiums jumping from around 0.25% to as high as 3% of ship value, adding millions to each tanker shipment.
Energy shortage
Diplomatic efforts and energy security concerns
China's LNG imports are also under stress as around 30% of its supply comes from the Gulf, mainly Qatar. Export disruptions have tightened global availability, and alternative pipeline supplies can't fully replace seaborne LNG in the short term. China has called for de-escalation and safe navigation through the Strait of Hormuz. Beijing has not publicly supported either the US blockade or Iran's restrictions but is pushing for diplomatic engagement through bilateral and multilateral channels.