I recently discussed this highly important topic with Prime Sarmiento of China Daily in Hong Kong, and it was exciting to be quoted in the resulting insightful article.

We reviewed together the fact that China, the largest economy in Asia, imports around 70% of its oil from the Middle East. It is now the largest recipient of oil from Saudi Arabia. The country has considerably increased its imports of Iranian oil over recent years, with exports of Iranian oil to China reaching 85% of Iran’s total oil exports last year. Disruption of oil supplies would therefore pose a very real challenge for the Chinese economy if present tensions were to escalate.

Japan, South Korea, and the ASEAN countries are also heavily reliant on energy imports from the region, with potentially similar negative impacts.

In addition, central banks may well be obliged to increase interest rates to combat inflation arising from higher oil prices. This would cause volatility in Asian equity markets and falling bond prices. We have already seen declines in ASEAN stock markets over the last two weeks. The cost of credit will rise for companies, resulting in reduced profitability and heightened uncertainty.

We may well see a flight to safe-haven assets such as gold and dollar-denominated securities. This outflow of funds will negatively impact local currencies, even though, other than China, Asian countries have little trade and investment with Israel or Iran. Combined with the external perception of weakening economies, this would weigh on local currencies for some time.

Several other key topics were discussed. Overall, the impact on Asian economies in the event of continuing or worsening hostilities will be severe.

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