China’s risk-reward is shifting

An underappreciated theme shaping this year’s China story is energy resilience amid rising geopolitical risk. As conflict around Iran and the Strait of Hormuz roils oil markets, Beijing’s multi-layered energy security strategy is drawing attention for its potential to cushion vulnerability through stockpiling, diversification and strategic infrastructure.

For more than two decades, China has expanded its strategic petroleum reserves and built storage capacity as part of a hedge against supply disruption. While the country remains the world’s largest net crude importer and is exposed to sustained price spikes, its diversified sourcing and overland corridors reduce reliance on any single maritime chokepoint. These measures do not eliminate oil risk, but they may help contain spillover into China’s broader economy.

Compared with several major energy-importing economies, China is in a somewhat less precarious position. Japan relies on imports for roughly 85% to 90% of its primary energy, and the European Union imports more than half of its energy needs. India, meanwhile, imports the vast majority of its crude oil.¹ While countries such as Japan also maintain sizable strategic petroleum reserves, reserves alone do not change underlying import dependence or energy mix. China remains heavily reliant on imported oil but generates most of its electricity from abundant domestic coal and has spent years building and securing diversified supply routes—moderating broader energy vulnerability even if it is not fully insulated.

That relative insulation has been visible in markets. Within the first 11 trading days following the late-February escalation of the Iran conflict, Asian equity markets diverged. While Asia’s other major markets—India, Japan, Taiwan and South Korea—declined about 6.0% to 15%, China’s broad market was roughly flat in US dollar terms—experiencing the smallest pullback among the group.² In our view, part of the sharper declines in markets such as Taiwan and South Korea may also reflect profit-taking after recent strong gains.

Energy resilience alone is not an investment thesis. But it reduces one dimension of macro risk in a volatile global environment. Policymakers have simultaneously signaled realism on growth. China’s 2026 gross domestic product (GDP) target of 4.5% to 5% is the lowest in decades. Even so, it remains well above growth expected across most advanced economies, where forecasts generally cluster around 1%–2%.³ The modest target reduces the risk of abrupt tightening and allows Beijing to pursue structural reforms while maintaining targeted support for priority sectors.

Slower headline growth does not automatically imply weak equity returns. If growth composition improves—toward higher-value manufacturing, technology and domestic consumption—equity markets can respond positively even in a lower-growth regime.

Support for stabilization

China’s headline Consumer Price Index rose 0.8% year-over-year in December, with full-year inflation flat versus 2024. China’s Spring Festival data also showed resilience. Average daily travelers rose 8.7% year-over-year, retail sales in major regions increased meaningfully, and February production largely sustained January’s pace.⁴

Externally, China’s trade data underscores adaptability. Goods exports grew in the mid-single digits in 2025 despite elevated US tariffs, and China saw a record trade surplus of roughly US$1.2 trillion, supported by stronger flows to southeast Asia, Europe and emerging markets.⁵ The extension of tariff suspensions through late 2026 reduces near-term escalation risk, while dialogue around critical supply chains such as rare earths suggests a more pragmatic tone.

Structurally, the economy is shifting. High-tech and green industries (dubbed the “new trio” of electric vehicles (EVs), lithium-ion batteries and solar products) are projected to account for roughly 20% of GDP in 2026 and could rise further by 2030, while property’s share continues to decline.⁶