- China recorded 5% GDP growth in Q1 2026 despite mounting energy supply risks linked to the Middle East conflict.
- Strategic oil reserves, coal based power generation and fuel subsidies are cushioning the short term economic impact.
- Wood Mackenzie warns that a prolonged Strait of Hormuz closure could intensify inflation, weaken exports and force downward revisions to growth forecasts.
China’s economy demonstrated resilience in the first quarter of 2026, recording GDP growth of 5% despite an escalating energy crisis linked to conflict in the Middle East, according to a new report by Wood Mackenzie.
However, the consultancy warned that the full economic impact is expected to emerge over time as strategic energy buffers decline and inflationary pressures restrict Beijing’s policy flexibility.
China remains heavily exposed to disruptions in Middle Eastern energy supplies, with 55% of its crude oil imports and 30% of LNG imports at risk due to the ongoing closure of the Strait of Hormuz. While the country’s official 2026 growth target remains between 4.5% and 5%, analysts believe prolonged supply disruptions could place severe pressure on economic performance.
According to Yanting Zhou, principal economist for Asia Pacific at Wood Mackenzie, the immediate impact of the crisis has been softened by crude oil inventories already in transit, strategic petroleum reserves and the country’s ability to switch power generation from gas to coal.
“The impact of the Middle East conflict has been limited in March, supported by cargoes already at sea and available storage at refineries. However, with the Strait of Hormuz closure continuing in April, the looming global energy crisis poses additional pressure on the country’s growth target,” Zhou said.
Wood Mackenzie estimates that China’s total oil reserves could offset Middle Eastern import shortfalls for more than 270 days. Non state commercial and refinery reserves alone are expected to provide a 180 day buffer without triggering immediate fuel rationing.
China’s power sector is also benefiting from significant spare coal generation capacity. Coal fired power accounted for 50% of total electricity generation in 2025, while gas based generation represented only 4%, giving utilities flexibility to reduce gas dependence during shortages.
The government has further intervened by subsidising refiners to absorb roughly half of the increase in crude oil prices, helping to contain inflationary pressures across the economy.
At the same time, China’s electric vehicle sector is emerging as a major growth driver amid rising global fuel prices. Wood Mackenzie reported that EV exports surged by 77.5% year on year in Q1 2026, with March shipments alone increasing nearly 140% to record levels.
Zhou said stronger global demand for electric mobility is expected to continue throughout 2026 as fuel costs rise worldwide.
The report also highlighted rising demand for electric two wheelers across Southeast Asia. Exports to Myanmar increased by 617% year on year during the first quarter, while shipments to Laos and Cambodia rose by 26% and 34% respectively as regional economies confront tightening oil supplies.
Despite these areas of resilience, pressure is building across several sectors of the Chinese economy.
Exports to the Middle East, which accounted for 7% of China’s total exports in 2025, have fallen sharply due to logistics disruptions and reduced shipping capacity linked to the Strait closure. Chinese exports to the region declined by 42% year on year in March, with rerouted shipping routes operating at only 10% of the original Strait capacity.
China’s petrochemical industry is also under increasing strain. The country relies heavily on Middle Eastern imports of LPG, naphtha and methanol, and feedstock shortages have already forced production cuts at petrochemical facilities since March.
Industries downstream from plastics and fertilisers to synthetic fibres are facing higher raw material costs alongside constrained supply availability.
Wood Mackenzie expects China’s economy to enter a downturn from May onwards, although rising inflation is complicating Beijing’s response options.
The consultancy previously forecast one or two interest rate cuts by the People’s Bank of China during 2026. However, inflation is now projected to reach 1.9% this year, compared with a 0.1% decline recorded in 2025.
According to Zhou, lowering interest rates under current conditions could further accelerate inflation, while maintaining rates would do little to stimulate weak private investment and consumer demand.
Wood Mackenzie believes Beijing is likely to delay additional economic stimulus measures until the Strait of Hormuz reopens in order to avoid inflating infrastructure project costs and triggering broader inflation risks.
The consultancy warned that if the Strait closure extends beyond two months, policymakers will face increasingly difficult trade-offs between supporting economic growth and maintaining price stability, potentially forcing further downward revisions to China’s economic outlook.
Author: Bryan Groenendaal
