Dragoman Digest

China’s softened oil demand cushions Hormuz’s energy shock‍ ‍

Beijing’s reduced imports of crude have helped relieve global supply pressures

With a fifth of the world’s oil supply struggling to exit the Strait of Hormuz for nearly three months, there had been expectations of much larger price increases. So far at least, these fears have not come to pass, with oil continuing to trade below US$100. Reduced Chinese demand has played a major role in softening price increases. China is the world’s largest importer of crude oil, importing an average of 11.6 million barrels per day (bpd) in March. In May, China recorded an eight-year low in average crude imports of 7.8 million bpd. This time last year, Chinese demand was even higher, around 13 million bpd. Such a dramatic drop in imports, combined with the drawdown of oil stockpiles in the West and in East Asia and a modest uptick in traffic exiting Hormuz, has helped alleviate price increases.

The exact drivers of China’s reduced demand are unclear. A combination of factors is at play. Satisfying Chinese demand, for instance, only requires around seven million bpd of imports. Inflated Chinese demand has been driven by stockpiling and export growth across refined oil products and petrochemicals. China has drastically curtailed exports of refined oil products, particularly of diesel and jet fuel. Overall refined oil product exports were 300,000 bpd in April, down 65 percent from last year. China is also increasingly using coal as opposed to crude in petrochemicals production. Though data on Chinese oil stockpiles is famously opaque, Beijing is understood to have ordered several modest drawdowns of its commercial inventories, with total stocks estimated at nearly 1.4 billion barrels entering 2026. Stronger domestic production and additional imports of Russian crude are also part of the equation.

None of this means that global markets are out of the woods. China’s stockpiles, however vast, are finite, and imports will not remain at seven million bpd indefinitely, even if rising EV uptake caps any rebound in oil demand. The northern hemisphere’s summer will also put upwards pressure on prices.

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AI exports mask industrial decline across East Asia’s advanced economies

Prosperity is increasingly narrowly concentrated

At one level, East Asia is experiencing an economic boom. Taiwan’s economy is expanding at 14 percent annually, operating profits at South Korea’s largest firms have risen 159 percent over the past year, and Japan’s corporations are reporting record earnings. The source of this strength is AI demand, which powers Taiwanese and South Korean chipmakers and their Japanese equipment and materials suppliers. Otherwise, the region’s manufacturing base is largely contracting. Excluding AI-related goods, Taiwanese exports have fallen 40 percent since 2022. Chip shipments have pulled South Korea’s China trade balance back into surplus, though its other exports are stagnant globally. Japan’s non-AI industry is in decline. By one estimate, AI accounts for all of the region’s 15 percent rise in industrial output since 2019.

China’s industrial upgrading from assembly-based manufacturing to areas higher up the value chain is driving this bifurcation. Chinese carmakers are displacing Japanese peers in segments they long dominated. South Korean battery plants are running at half capacity. In chemicals, Chinese overcapacity has cut Japanese output by a quarter since 2019. Taiwan’s long-running surplus with the mainland flipped into deficit this year. Industrial policy in each jurisdiction is nonetheless leaning into the AI boom. Seoul plans US$530 billion of semiconductor support over two decades. A Taiwanese scheme lets chip firms cut their tax bills by up to half through credits for research and equipment spending.

Exports across the trio are 73 percent more concentrated by product and destination than the developed-world average. Taiwan is the most extreme – two-thirds of its chip-heavy exports go to the US and China. Export-led growth models have suppressed private consumption, which languishes at around 40 percent of GDP in South Korea and Taiwan, against a rich-world norm of 60 percent. Semiconductors are notoriously prone to boom and bust, yet forecasts of a compute crunch suggest the boom could run for years. Such an outcome would only entrench the region’s industrial concentration, and with it the exposure to any shock.

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Iranian threat accelerates Gulf defence buildout

The UAE is leading the Gulf’s development of domestic defence industries amid Iranian threats and US supply uncertainty

With the ongoing threat of Iranian drone and missile attacks, Gulf states are increasingly bolstering their indigenous defence industries. Gulf states have long been dependent on Western and predominantly US defence systems, making up a fifth of global arms purchases. As questions around US supply reliability and industrial capabilities continue to be highlighted, particularly regarding munitions depletion and delivery delays, domestic production has gathered pace. Saudi Arabia, for instance, intends to spend half of its defence budget domestically under Vision 2030 – up from a quarter today. Saudi Arabian Military Industries (SAMI) is leading Saudi’s efforts, with a lofty objective to enter the ranks of the top 25 global defence firms by revenue by 2030. The Kingdom’s neighbours share its ambitions. Earlier this year, Qatar’s Barzan Holdings signed R&D partnerships with defence giants Lockheed Martin and BAE Systems to bolster domestic defence innovation.

Of the Gulf states, the UAE appears to be the most advanced. Formed in 2019 through a merger of 25 Emirati firms, the EDGE Group has rapidly turned itself into a serious global defence player. EDGE has benefited from strong state backing, capital, and foreign partnerships with established firms such as Anduril and Leonardo. These factors have allowed it to scale production. EDGE recently became the world’s third-largest precision-guided weapons manufacturer. In 2025, revenue topped US$5 billion, with three-quarters derived from exports. EDGE’s focus on developing systems and components whose supply chains are insecure has also made it a critical asset during the recent conflict. UAE figures suggest 80 percent of Iranian drones were intercepted using Emirati electronic warfare systems. With domestic capabilities fully tested in combat, the UAE has provided the Gulf with a working model that its neighbours are yet to match.

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Alarm bells sound in Europe over China’s industrial expansion in Morocco

Chinese manufacturers’ increasing investments into Morocco will test the EU-Morocco free trade agreement

Morocco has long been a gateway to the European market for foreign investors. It offers tax exemptions, political stability, a young workforce, a network of 50 free trade agreements and, crucially, tariff-free access to the European market. European manufacturers, particularly in the auto parts industry, have also used Morocco as a lower-cost production hub for the EU market. Now, Chinese auto parts manufacturers are seeking to emulate their European competitors. Since the pandemic, Chinese investment into Morocco has exceeded US$6 billion, with nearly a dozen firms setting up shop in the Beijing-funded Tanger Tech City. Notable Chinese tenants include Sentury Tire and the world’s largest supplier of battery anodes – BTR New Material Group. Gotion High-Tech has also set up a US$1.3 billion battery gigafactory south of Tangier.

Brussels is watching with growing unease. The prospect of Rabat becoming a launchpad for heavily subsidised Chinese auto parts presents a major risk to Europe’s auto industry. Since 2024, European auto suppliers have shed over 100,000 jobs. Policing the exports of Chinese subsidiaries in Morocco without threatening the integrity of the broader bilateral trade agreement will be a tall order. Last year’s ruling that aluminium wheel imports from Morocco were unfairly subsidised through special economic zones linked to the Belt and Road Initiative was heavily criticised by Moroccan officials. Distinguishing between transhipment-style trade and local production will also be difficult. Morocco has stringent labour requirements and local content requirements to which Chinese companies will need to adhere – at least notionally.

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Rabat, however, can ill afford to ignore Brussels’ concerns. The EU is Morocco’s largest trade partner, with a third of its exports, worth US$30 billion, headed to the bloc. With Europe’s deindustrialisation becoming a growing political crisis, officials will continue to pursue more creative methods – including targeting the exports of Chinese companies in third countries – to protect the single market.

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