Score a win for the Chinese economy, at least according to Goldman Sachs.
With global energy prices surging 50% due to the Iran war, Goldman’s strategists argue that the Chinese economy is better positioned to weather this storm than its peers — including the US.
“China looks better placed than most in this oil shock,” Goldman Sachs strategist Kinger Lau wrote in a new note on Monday.
China’s perceived advantage stems from a decade of strategic preparation, Lau said.
The US and EU remain heavily reliant on petrol and other liquid fuels, which account for roughly 40% and 44%, respectively, of their primary energy consumption. But China has managed to reduce this figure to just 28%.
This diversification means that when the price of Brent crude oil (BZ=F) hits $115 per barrel, the direct inflationary “tax” on the Chinese economy is mathematically lower than what is felt in the West.
Read more: How oil price shocks ripple through your wallet, from gas to groceries
Goldman Sachs pointed to three specific “shields” protecting China from the global oil shock.
First is renewable energy dominance. Alternative and renewable energy sources, including nuclear, wind, solar, and hydro, now account for 40% of China’s electricity generation, up from 26% a decade ago.
Second is massive strategic reserves. China has spent years quietly building a “Great Wall of Oil,” Lau said.
Its strategic and commercial stockpiles now total approximately 1.2 billion barrels. This is enough to sustain the country for more than 110 days, even if all crude imports were to fall to zero tomorrow.
And lastly, China sports diversified supply chains.
While the world frets over the Strait of Hormuz — the shipping route accounts for 20% of global oil flows — China has maintained robust supply lines with non-Middle Eastern nations like Russia, Australia, and Malaysia.
Due to the oil price shock, Goldman’s economists have trimmed their US real GDP growth forecast by 0.4%. In contrast, China’s forecast was trimmed by only 0.2% — the lowest revision in the Asia-Pacific region.
The economic resilience of China’s economy doesn’t mean it’s time to load up on the region’s stocks, Lau warned. All economies have caught a cold because of much higher oil prices.
Lau explained, “While the direct impacts of higher for longer energy prices are likely more manageable for the Chinese economy, the spillover effects/concerns about global stagflation, more sticky US rates and a stronger Dollar, and sustained geopolitical risk premia could hurt China equities via the earnings, valuation, and money flows channels.”