Can Rising Oil Prices Benefit China's Reflation?
As oil surges from the Strait of Hormuz to gas stations across China, economists Guan Tao, Xiong Yuan, and Luo Zhiheng offer three very different answers.
According to the Economic Observer on March 20, at noon on March 19, at a highway service-area gas station somewhere in Guangdong province, a 45-year-old truck driver, Lao Zhou, filled his tank. The pump stopped at 2,360 yuan (about $342).
A week earlier, at the same station, the number had been just over 2,100 yuan (about $304). Lao Zhou has been in the road freight business for twelve years. He currently runs 12 round trips a month on the Shanghai to Guangzhou trunk route, connecting China's two most powerful regions, the Yangtze River Delta (around Shanghai) and the Pearl River Delta (around Guangzhou). Together, these two regions generate over 35% of China's GDP and account for nearly 60% of its total exports.
Each one-way leg is 1,400 kilometers; his truck burns 38 liters per hundred kilometers. At the current diesel price of 7.8 yuan (about $1.13) per liter, the fuel-cost increase alone is costing him an extra 3,200 yuan (about $464) a month. Freight rates haven't budged. He told the reporter that his net profit per trip has shrunk from 1,200 to 1,500 yuan (about $174 to $217) at the start of the year to just five or six hundred yuan (roughly $72 to $87) now.
When asked whether he knew about the Iran situation. Lao Zhou said he had scrolled past the words "Iran" and "Strait of Hormuz" on his phone. "I don't really understand what's going on over there. All I know is that when there's trouble on that side, diesel goes up on ours."
The trouble that Lao Zhou doesn’t really understand is pushing up global oil prices with brutal efficiency. On February 28, the United States and Israel launched a joint military strike against Iran. Iran responded by effectively blocking the Strait of Hormuz. Within ten days of the blockade, Kuwait, Iraq, and Qatar successively announced production cuts; Middle Eastern oil-storage capacity hit critical levels. On March 9, Brent crude crossed $100 a barrel for the first time in three years.
For China, which depends on imports for over 70 percent of its crude oil, the shockwave transmits almost instantaneously, from oilfield to refinery, from port to gas station, and from Lao Zhou’s ledger to his high-school-age child’s tuition back in Anhui, his aging parents’ medical bills, and the mortgage payment that comes due every month without fail.
But for China’s macroeconomy, what matters the most is the timing of this oil price increase.
China's economy is in a very critical position. The PPI — the index that measures factory-gate prices — has been negative for an extended stretch. The GDP deflator has been negative for eleven consecutive quarters. Firms dare not raise prices, consumers defer spending, investors wait and watch, and the waiting itself pushes prices down further, creating a negative feedback loop that keeps policymakers up at night. Just weeks ago, the 2026 Government Work Report wrote "bring the overall price level from negative to positive"推动价格总水平由负转正" into its annual policy objectives, its degree of bluntness rarely seen in recent years.
Chinese economists have begun to debate whether the high oil prices, born of Middle Eastern conflict, could finally break the low-price feedback loop.
Guan Tao, global chief economist at BOCI Securities — who recently attended the People's Bank of China's economic symposium and who briefed then-Premier Li Keqiang on the Chinese economy in 2022 — does not think the question is absurd. In a lengthy essay published on March 23, he cited the case of Japan, which was mired in deflation for three decades. The Bank of Japan exhausted every tool in its arsenal, from quantitative easing, qualitative easing, and negative interest rates, and deflation did not budge. What ultimately freed Japan were two external shocks it had not chosen: the 2020 global pandemic disrupted supply chains, and the 2022 Russia-Ukraine war ignited commodity prices. Imported inflation broke the old price expectations. Japan's CPI exceeded its 2% target for 45 consecutive months beginning in April 2022; the Nikkei index rose 75% over four years; the economy-wide leverage ratio fell by nearly 40 percentage points. A thirty-year deadlock, shattered by an inflation that was not of Japan's own making.
Guan Tao also mentioned that in 2021, China’s reflation fundamentals were actually stronger than Japan’s. China’s PPI inflation that year hit 8.1%, versus Japan’s 4.6%. Yet Japan achieved reflation the following year, while China narrowly missed the window twice. Part of the reason was that China’s supply-stabilization and price-control measures effectively dampened the transmission of imported inflation; when international coal prices surged as much as 7.6 times, domestic coal prices rose only 40%. Another part was that pandemic-era policies preserved the supply side but, against a backdrop of weak demand, exacerbated the imbalance between supply and demand.
His implication is not hard to read: this time around, facing another wave of imported inflation, China should perhaps not extinguish the fire as quickly as it did last time.
But such an idea is unlikely to win much sympathy on the factory floors that produce everyday goods seemingly unconnected to oil.
According to Blue Whale News (蓝鲸新闻) on March 20, the sustained surge in international crude prices has driven sharp increases in the price of adhesives, a product closely tied to petroleum. Henkel China, the world-renowned adhesive manufacturer, has sent letters to its customers announcing a 20% price increase on all products effective March 17, citing raw-material procurement costs that have "far exceeded manageable levels."
Adhesives are the invisible backbone of many consumer goods manufacturing processes, especially in the personal care sector. The production of sanitary pads and diapers depends on hot-melt adhesive for structural bonding, elastic-band fixing, and backing adhesion, all of which directly affect product comfort and safety. Blue Whale News reporters learned from multiple sanitary-pad contract manufacturers that the impact extends well beyond adhesives, with nonwoven fabrics, polymer materials, and other key inputs all affected. Overall production costs have risen approximately 20%, and prices are changing day by day, with all quotes valid only at the moment of final order placement. A personal-care brand executive told reporters that many private-label operations have already raised prices, but proprietary brands are still watching and waiting. "A month or two is manageable, but after that, the pressure will be severe."
The transmission logic behind these numbers is not complicated. Rising international oil prices push up polyethylene and polypropylene, which in turn raise the cost of everything from adhesives to nonwoven fabrics. Because many companies stocked up on materials in advance, they still have inventory to draw on, creating a lag before costs are passed on to consumers. But if the conflict persists, price increases for sanitary pads, diapers, and other daily necessities that touch every household are likely only a matter of time.
Luo Zhiheng, chief economist at Yuekai Securities, is also a long-term economic advisor, attended the economic symposium hosted by Premier Li Qiang in July 2023 and October 2024. In his report titled “Different Paths, Hard to Converge殊途难同归——油价上涨能否助推物价合理回升？” published on March 13, he pointed out that when prices rise due to demand-pull inflation, household incomes typically rise in tandem, and the pain can be offset. But when prices rise due to cost-push inflation, the burden lands directly on top of an existing income squeeze, and the pain is far more real. Energy and food account for a larger share of spending among low-income households, meaning oil-price increases erode these families' purchasing power the most.
Luo's view is more cautious than Guan Tao's. He does not deny that imported inflation may produce some serendipitous positives, such as breaking the self-fulfilling prophecy of low-inflation expectations, boosting nominal GDP and thus fiscal revenue, and reducing real interest rates and lightening corporate debt burdens. But he is more concerned about a fourfold cost, namely a direct increase in the cost of living for low- and middle-income groups; a profit squeeze on midstream and downstream firms caught between rising costs and flat selling prices; pressure on the exchange rate from deteriorating terms of trade; and, the most concealed yet most intractable risk, the possibility that if CPI is pushed above 2% by oil prices, public opinion could pressure the central bank into tightening at precisely the wrong moment, disrupting the normal rhythm of macroeconomic management.
What China needs, Luo argues, is not inflation per se, but the logic of a normally functioning economy that inflation is supposed to reflect, like firms that can turn a profit, households with employment and income, and a society with confidence in the future. Numbers pushed up by oil prices do not automatically equate to any of these things.
The trending topic "oil prices rise, hardshell jackets get pricier" recently surged onto Weibo's hot-search lists, corroborating Luo's analysis from another angle.
Polyester, nylon, spandex, and other synthetic fibers are the primary raw materials for hardshell jackets and athletic apparel, and all of them are, at root, petroleum derivatives. According to the Qilu Evening News on March 20, as crude prices climbed, chemical-fiber feedstocks spiked in response, and polyester quotes jumped more than 20% overnight. The main input for hardshell jackets, polyester POY (partially oriented yarn), soared from 7,000 yuan (about $1,015) per ton in late January to 9,600 yuan (about $1,391) per ton by mid-March, an increase of over 35%.
Fabric costs account for 60 to 70% of a hardshell jacket’s total production cost. For a mass-market jacket priced around 500 yuan (about $72), raw-material costs have risen by nearly 40 yuan (about $6); for mid- to high-end models above 1,000 yuan (about $145), the increase ranges from 60 to 100 yuan (roughly $9 to $14). Even though leading brands like Arc’teryx have not yet officially announced price adjustments, the industrywide cost pressure is unmistakable.
From the gas pump to the wardrobe, oil's transmission chain is longer and more hidden than most people imagine. The same Qilu report noted that fertilizer and pesticide production are heavily dependent on oil and gas. Rising agricultural input costs, compounded by higher diesel prices, are driving up both farming and logistics costs. And higher logistics costs eventually pass through to food delivery, fresh produce, and other end-consumer channels. From transportation and clothing to food and daily necessities, petroleum-driven cost pressures are silently seeping into every corner of daily life.
Xiong Yuan, chief economist at Guosheng Securities, pointed out in an analysis on March 10 that rising oil prices will widen the divergence in corporate profitability. Upstream and midstream profits stand to improve significantly, while downstream profits may be squeezed. He reviewed the experience of the previous PPI recovery cycle, also driven by imported factors, in which upstream sectors such as oil extraction, coal, and nonferrous metals saw revenues and profit margins surge in lockstep, while downstream sectors such as electrical machinery, telecommunications electronics, and general equipment had limited pricing power, faced rising costs, and saw profit improvement that was modest at best, and deteriorating at worst.
The Chinese government decided not to stay idle. At 3 p.m. on March 23, nine hours before the current refined-fuel price-adjustment window was due to open, the National Development and Reform Commission (NDRC) issued a brief announcement.
Under the existing pricing mechanism, which adjusts domestic fuel prices every 10 working days, the current round should have resulted in increases of 2,205 yuan (about $320) per ton for gasoline and 2,120 yuan (about $307) per ton for diesel. But the NDRC decided to raise prices by only 1,160 yuan (about $168) and 1,115 yuan (about $162) per ton, respectively. The roughly 1,000 yuan (about $145) per ton that was not passed through translates to approximately 0.85 yuan (about $0.12) per liter. The announcement's language was explicit, the measure was taken to "mitigate the impact of the abnormal surge in international oil prices, ease the burden on downstream users, and safeguard stable economic operation and people's livelihoods."
China's refined-fuel pricing mechanism has a ceiling mechenism, when international oil prices exceed $130 per barrel, domestic fuel prices are in principle no longer raised, or raised only minimally. This ceiling had not yet been triggered, but the NDRC intervened preemptively anyway. Sending signal that the government did not intend to wait for the mechanism to activate, but to chose to cushion the blow early, to smooth the curve.
For Lao Zhou, this means his 400- to 600-liter tank will cost 300 to 500 yuan (about $43 to $72) less each time he fills up. It’s not a lot, but when his net profit per trip is down to five or six hundred yuan ($72 to $87), that sum is the difference between the pump counter clicking forward and not, the difference between making the mortgage payment on time at the end of the month and falling behind.
But a single ad hoc intervention is obviously not enough. In his report, Luo Zhiheng laid out a more systematic set of policy recommendations. On the supply side, he proposed flexible use of strategic petroleum reserves, absorbing when prices are low, releasing when prices are high, as a peak-shaving, valley-filling stabilizer. At the micro level, he called for targeted tax cuts or subsidized loans for sectors directly impacted by the shock, including transportation, logistics, and downstream chemicals, as well as price subsidies or consumption vouchers for low- and middle-income households. At the macro level, he argued that monetary policy should anchor on core CPI and the output gap rather than headline price indices distorted by oil, and should clearly signal to the market that the moderately accommodative policy stance remains unchanged, to prevent unnecessary speculation about a policy pivot.
Guan Tao’s recommendations look further ahead. He called for using the stability of domestic circulation to hedge against the uncertainty of international circulation, by implementing household-income growth plans, cracking down on involutionary competition to reduce ineffective supply, and advancing public-utility price reform to unclog the transmission from PPI to CPI. He also made a point of revisiting a piece of history as a cautionary note. In 2021 and 2022, PPI inflation averaged 8.1% and 4.2%, respectively, yet the central bank not only refrained from tightening but actually continued to cut reserve requirements and interest rates, because CPI remained well below the 3% target. In hindsight, that judgment was correct. From 2023 through 2025, PPI was persistently negative and CPI sank to near zero. Had the central bank misjudged and tightened prematurely, the consequences would have been severe. That historical experience, Guan clearly believes, remains relevant today.
So, is the high oil price caused by the Middle Eastern conflict ultimately good news or bad news for China's reflation?
The three chief economists offer three different answers. Guan Tao is the most optimistic, arguing that China should learn from Japan’s experience and maintain a degree of tolerance for this bout of imported inflation, rather than repeating the mistake of twice letting reflation slip through its fingers. Xiong Yuan leans toward neutral, emphasizing that the direction of price recovery remains intact but stressing that divergent corporate profitability and the risk of U.S. stagflation are side effects that cannot be ignored. Luo Zhiheng is the most cautious, returning again and again to a fundamental question, can an improvement in the price numbers translate into a genuine improvement in conditions for real people and real firms?
High oil prices may indeed break the vicious cycle of low-inflation expectations, improve upstream business performance, and boost nominal GDP. But at the same time, they place the heaviest burden on the most vulnerable. The core problem of the Chinese economy remains insufficient effective demand. If rising oil prices do not correspond to more orders for businesses, a recovery in household incomes, and a restoration of confidence across society, then they amount to nothing more than an illusion of economic growth.