Hua Chuang Securities' Zhang Yu: High oil prices bring "clearing out," China's midstream market share may "rise"

Huachuang Securities Chief Economist Zhang Yu published a research report discussing the possibility of China's midstream manufacturing share increasing under the sustained high oil prices. The report is mainly based on four logics: first, from the perspective of global manufacturing's external dependence on oil and gas, China is in a moderate position with more manufacturing industries and a higher import dependence on oil and gas. Second, based on the experience of the 2020 pandemic, external shocks often lead to supply chain reshaping and an increase in new demand. The new demand from this round of high oil prices is expected to focus on the energy substitution field, from which China is expected to benefit. Third, from the analysis of the two oil crises in the 1970s and 1980s, manufacturing powerhouses with relatively low oil and gas import dependence (such as the United States) saw a noticeable increase in midstream share during the oil crisis. Considering that the US implemented a relatively tight monetary policy to curb high inflation at that time, China's current inflation level does not require a tightening monetary policy, so the resistance to the increase in China's midstream share may be smaller. Fourth, from experiences since 2000, every significant increase in oil prices has led to an increase in China's midstream manufacturing export share, possibly due to the impact of oil prices on China's energy costs (such as industrial electricity). The main points of Huachuang Securities are as follows: 1. Current situation: Global manufacturing relies on imported oil and gas 2. Historical experience: Analysis of the impact of oil crises on midstream manufacturing 3. Future prospects: Prediction of ways for China's midstream share to rise due to high oil prices - Pathway one: Reshaping supply chains, transferring orders to China - Pathway two: Increase in new demand, benefitting China - Pathway three: Increase in cost advantages, aiding in the increase of share Overall, the report suggests that China's midstream manufacturing sector may experience an increase in market share in the context of sustained high oil prices and geopolitical conflicts.