China Facing Twin Shocks

Research evidence excerpt

China Facing Twin Shocks

• Higher inflation is the result of a cost-push shock rather than stronger demand. Therefore, the price increase is unlikely to

be sustainable if oil prices stop rising (China's PPI Turns Positive - Higher prices? Yes. Reflation? No., 10 Apr 2026).

• Policymakers are unlikely to tighten due to higher inflation readings. Meanwhile, given the strong 1Q growth, they will not

loosen either. In short, Beijing will likely remain in a wait-and-see mode.

China will pay more for oil imports, but it is manageable

• In 2025, China imported about 4.2bn barrels of crude at an average price of US$70/bbl. If the same amount were

purchased this year at an average US$100/bbl, China would need to pay roughly US$126bn more (US$30 × 4.2bn).

Compared with the US$1.2tn goods trade surplus last year, an additional US$100-200bn payment for oil imports is

manageable.

• In reality, China has already started buying less oil due to higher prices. In April, crude oil import volumes fell 20% yoy to the

lowest level since Aug 2022.

Corporate ROE under pressure with significant distributional effects

• Upstream sectors have benefited from higher prices, with chemicals profits up 54% and energy up 7% yoy in 1Q26. They

are set to gain more in the quarters ahead.

• Downstream consumer sectors face margin compression due to weak price pass-throughs. In 1Q26, consumer

discretionary profits fell 24% and consumer staples were down 13% yoy.

Consumers feel less pain thanks to the fuel-pricing mechanism

• While Brent has climbed more than 40% since late Feb, domestic gasoline prices have risen only 18% (Fig 5).

China's energy security remains solid

• Crude oil accounts for only about 18% of China’s energy consumption (Fig 6). If crude oil imports drop 20% in the months