Oil prices rock global markets—has the A-share market become a safe haven?

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Since the outbreak of the Iran conflict, global markets have come under pressure, oil prices have skyrocketed, yet the capital market of the world’s largest crude importer has defied the trend—China is quietly becoming the most unexpected safe haven in this energy crisis.

Since the conflict broke out at the end of February, the CSI 300 Index has fallen only 0.3%, while oil prices surged nearly 65% during the same period, approaching $120 per barrel. Meanwhile, the RMB/USD exchange rate remained basically stable, outperforming almost all Asian currencies. The RMB exchange rate index (CFETS RMB Index) hit a one-year high last week. China’s 10-year government bond yield rose by only about 1 basis point, while U.S. and French bond yields climbed more than 20 basis points.

This phenomenon reflects China’s systematic energy strategy over the years—large-scale investment in renewable energy, promotion of electric vehicles, and the establishment of massive strategic reserves have reduced China’s reliance on imported fossil fuels. "Chinese assets as safe-haven tools have been overlooked by global investors," said Cary Yeung, Head of Fixed Income, Greater China, Pictet Asset Management.

Analysts believe that China’s domestic economic fundamentals and policy execution remain fundamental factors determining the medium- and long-term direction of the market.

Global market turmoil, China remains stable alone

Since the Iran conflict erupted at the end of February, global markets have experienced severe shocks. Crude oil prices once approached $120 per barrel, triggering concerns over a comeback of inflation and hindering central bank rate cuts, before easing back after Washington sent signals for a possible ceasefire.

Asian markets, highly dependent on imported energy, were hit first. According to Bloomberg, Japan, South Korea, and India’s stock markets have fallen by about 6%, 9%, and 4% respectively since late February; European markets dropped about 5%, and U.S. stocks fell by 1.4%.

In contrast, the CSI 300 Index fell just 0.3%. That means investors who kept money in Chinese stocks rather than shifting funds from Asia to the U.S. enjoyed better capital preservation than in most major markets. Exchange rates and bond markets paint a similar picture—RMB outperformed its Asian peers, and the rise in China’s 10-year government bond yield was far lower than that of U.S. and French bonds.

Energy transition buffer, strategic reserves build a safety net

Analysts believe China’s energy strategy provides structural support for the market’s resilience.

After 2021 and 2022, the government prioritized stable energy supply. Coal production reached historic highs, solar and wind power capacity expanded significantly, with storage systems quickly following suit, accelerating renewable electricity growth. China also steadily increased domestic oil and gas production.

On reducing fossil fuel dependence, sales of electric and hybrid vehicles in China now exceed traditional gasoline cars, and gasoline demand—which accounts for more than one-fifth of China’s oil consumption—has entered a long-term decline. Regarding strategic reserves, according to data provider Kpler, China’s strategic oil reserves can cover about six months of Middle East import losses under the worst-case scenario.

Larry Hu, Head of China Economics at Macquarie Group, said, "Short-term shocks are limited and can be buffered." He estimates that even if crude oil rises to $100 per barrel, the upward impact on consumer inflation in China would be only about 1%.

Tactical opportunity rather than full rotation, investors cautiously optimistic

"Chinese assets may continue to show relative strength in the short term, but we see this more as a tactical opportunity rather than a structural shift," said Clarence Li, Chief Portfolio Analyst, Multi-Asset & Equity Strategies at T. Rowe Price. He added, "The investment logic in China is more geared toward selective thematic exposure rather than broad bets on stocks, bonds, or FX."

Currently, investors focusing on China are prioritizing sectors related to energy security and domestic demand. The CSI 300 Energy Index has risen about 8% since late February, making it the best-performing sub-index; renewable energy stocks are even more remarkable, with Jinko Solar’s share price up about 13%.

Trevor Slaven, Global Head of Asset Allocation & Multi-Assets at Barings, believes that defensive money flows into Chinese assets are more likely to happen after market volatility subsides, and will largely favor equities over government bonds.

William Bratton, Head of Asia Pacific Cash Equity Research at BNP Paribas, pointed out in a Monday report that if the Iran conflict lasts longer than expected, China’s relative resilience may become more pronounced. "We believe China is more attractive than other APAC markets due to its more domestically oriented economic structure, including energy supply," he wrote.

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