While the closure of the Strait of Hormuz is causing severe headwinds for the global economy, China is relatively more resilient to these challenges argues Steven Luk, CEO of FountainCap.
The ongoing conflict in the Middle East, particularly involving Iran, has reinforced a reality that long-term investors must confront: while wars may conclude, geopolitical instability is likely to persist. For UK Local Government Pension Scheme (LGPS) investors, this evolving backdrop is not just a geopolitical concern—it is increasingly a defining macro driver of asset allocation.
Against this backdrop, China’s structural positioning—both economically and geopolitically—has become more compelling.
Iran conflict: a structural tailwind for China
The Iran conflict is unlikely to resolve cleanly or quickly. Iran’s decentralised military doctrine, its deep-rooted ideological positioning, and its asymmetrical strategy of endurance suggest a prolonged period of instability rather than a defined resolution.
A prolonged conflict has clear macro implications:
- Sustained energy volatility: Elevated oil prices feed directly into global inflation, disproportionately impacting energy-import-dependent economies such as Japan and South Korea.
- Food insecurity risks: Disruption in the Strait of Hormuz threatens fertiliser flows, tightening global agricultural supply chains.
- Rearmament and fiscal strain: Defence spending in both Europe and the Middle East is likely to accelerate, placing additional pressure on already stretched fiscal positions.
Most importantly, Iran does not need to win—it simply needs to survive. A strategy built on endurance allows it to outlast the political and fiscal tolerance of its adversaries, extending the conflict into a prolonged war of attrition.
China, however, enters this environment from a position of relative resilience:
Energy is the most immediate channel. China accounts for close to 40% of oil flows through the Strait of Hormuz, yet imports represent less than 20% of its total energy mix, with dependency on the strait estimated below 10%. By contrast, Japan and South Korea rely on imports for 80–90% of their energy, with over 60–70% transiting through Hormuz.
China has also reached peak oil usage while renewable capacity has expanded to roughly 60% of installed capacity, providing a meaningful buffer against sustained shocks.
Food security presents a similar dynamic. China is close to 100% self-sufficient in staple grains, while approximately one-third of globally traded fertiliser moves through Hormuz—creating the potential for global food inflation in a prolonged disruption.
In effect, what is inflationary and destabilising for much of the world is comparatively manageable—and in some cases advantageous—for China. Elevated energy costs elsewhere raise relative production costs, accelerating the relocation of global industrial capacity into China.
Why You Should Invest in China
If the geopolitical environment is shifting, so too is China’s economic model.
Much of the scepticism toward China remains anchored in an outdated narrative centred on property and cyclical slowdown. Yet the data suggests a structural transition is already well underway.
The property correction has been severe: residential construction has fallen by roughly 70% since 2021, with sales declining by over 50%, reducing the sector’s contribution to GDP from around 25% to just 7%.
While painful, this adjustment has removed a structural imbalance. It has freed up both capital and policy capacity to support what Beijing is now prioritising—the “tangible economy.”
This includes advanced manufacturing, renewables, robotics, healthcare infrastructure, and new consumption categories. These sectors represent a broader and more sustainable growth base, increasingly aligned with global demand and supply chain repositioning.
At the policy level, direction is equally clear.
China has effectively established a 4% growth baseline as the minimum required to reach its 2035 objective of becoming a moderately developed economy, implying continued policy support whenever growth approaches that floor.
The 15th Five-Year Plan reinforces this shift toward domestic resilience. Consumption, currently around 40% of GDP, is targeted for expansion through RMB 250 billion of stimulus programmes and an additional RMB 100 billion aimed at financing and demand generation.
Equally important is the pivot toward “investing in people”—expanding healthcare, pensions, and social protections to reduce precautionary savings and unlock demand.
Capital markets are also entering a different phase. Household deposits exceed RMB 160trn, while dividend payouts have reached RMB 2.6trn—now surpassing total household interest income. Dividend yields exceed 4%, double typical savings alternatives, creating a compelling case for reallocation toward equities.
Despite this, valuations remain attractive. MSCI China trades at roughly 20x forward earnings versus over 30x for the S&P 500, alongside materially higher free cash flow yields and low global ownership.
Closing thoughts: a more stable force in a fragmenting world
As geopolitical tensions persist, energy volatility rises, and fiscal constraints tighten across developed markets, the global system is becoming more fragmented. In that environment, capital is likely to gravitate toward economies that offer not just growth, but resilience and policy clarity.
China’s dual-circulation strategy—designed to balance domestic self-reliance with global integration—positions it to absorb external shocks while maintaining a credible path to growth.
At the same time, an unintended consequence of prolonged global instability may be to accelerate China’s role as the anchor economy within Asia. As neighbouring economies struggle with energy dependence and rising costs, China’s relative insulation and industrial depth increasingly position it as the region’s central node.
Perhaps most notably, perceptions are beginning to shift. In a world where policy unpredictability is no longer confined to emerging markets, China now stands out for the coordination of its fiscal, monetary, and industrial policies, alongside relatively low interest rates and clearly articulated medium-term objectives.
For LGPS investors, the question is no longer whether China carries risk—it clearly does—but whether, in a more volatile and fragmented world, it is becoming a relatively more stable and strategically important component of a diversified portfolio.
