China’s Malacca Dilemma, After Hormuz

Get audio access with any FP subscription. When the United States and Israel struck Iran in February, Tehran did what it had long threatened to do: shut the Strait of Hormuz, the narrow stretch of water that normally carries a fifth of the world’s oil and natural gas. Missiles flew. Mines dropped to the seabed. Tankers turned back. Blockading the only exit from the Persian Gulf was not just a physical act but also a financial one. War-risk premiums for ships transiting Hormuz soared overnight as private insurers repriced coverage beyond what any shipping company could absorb or refused to write it at all. When the United States and Israel struck Iran in February, Tehran did what it had long threatened to do: shut the Strait of Hormuz, the narrow stretch of water that normally carries a fifth of the world’s oil and natural gas. Missiles flew. Mines dropped to the seabed. Tankers turned back. Blockading the only exit from the Persian Gulf was not just a physical act but also a financial one. War-risk premiums for ships transiting Hormuz soared overnight as private insurers repriced coverage beyond what any shipping company could absorb or refused to write it at all. China was among the nations caught in the squeeze, despite years of courting Tehran and receiving guarantees that Chinese ships would be allowed through in the event of a blockade. Roughly half of China’s oil imports come from the Middle East. If Beijing cannot keep its oil flowing when a friendly power controls a critical choke point, then what happens when an adversary, such as the United States, controls the next one? That question should haunt Chinese President Xi Jinping. China has built the world’s largest fleet of electric vehicles, solar panels, and wind turbines. But its factories, trucks, ships, and fighter jets still run on oil. Roughly 11 million of the 15 million to 16 million barrels that it burns per day travel by sea through waters that Beijing does not control. Although nearly 40 percent transits the Strait of Hormuz, that is not the choke point that matters most. That distinction goes to the Strait of Malacca, the long, narrow sea-lane co-managed by Malaysia, Indonesia, and Singapore. Its narrowest stretch, the Phillips Channel, is less than 3 kilometers wide. (Hormuz’s narrowest navigable channel is about 4 kilometers.) Some 23.2 million oil barrels cross Malacca every day, more than what flows through Hormuz. About 80 percent of China’s oil imports pass through Malacca via tanker. Beijing has long seen China’s heavy dependency on Malacca as a vulnerability. In 2003, then-President Hu Jintao warned of the “Malacca dilemma”: the concern that any hostile power controlling the strait could hold China’s energy supply hostage. Hu feared a physical blockade where Chinese tankers were turned back by force. The Iran crisis revealed something more insidious. In a conflict over Taiwan, China’s petroleum pathways could be shut without a naval blockade. For that, the United States would need just two things: to price China out of the insurance market and to warn the littoral states that facilitating Chinese oil imports carries its own, heavier cost. The Iran war made brutally clear that shipping runs on insurance; without cover, ships stay in port. When fighting began, war‑risk premiums for ships transiting Hormuz jumped from about 0.25 percent of hull value to between 3 percent and 10 percent. Even at the lower end of that range, the insurance premium for an average-size $250 million tanker exploded from $625,000 to $7.5 million per voyage, making transit commercially unviable. What stopped traffic was, in effect, a new high‑risk designation from Lloyd’s Market Association’s Joint War Committee (JWC), a panel of Western underwriters whose guidance the global market, including China’s own maritime insurers, routinely follows. Besides the lack of Chinese representation on the panel, what troubles Beijing is how far the JWC’s reach extends. When the Iran war began, a single circular added not just Bahrain, Kuwait, and Oman to its list of perilous areas, but also Djibouti, where no shots were fired. Djibouti was listed because it sits on the Bab el‑Mandeb Strait, which Iran’s Houthi allies threatened to close. Just the threat of an attack was enough to send premiums there soaring twentyfold, from a nominal 0.05 percent to 1 percent of hull value. Apply that to a Taiwan crisis. All that would be required to threaten Malacca’s viability is a persuasive case that the conflict could spill into the South China Sea and from there into Asia’s main oil corridor. And to China’s detriment, the bar for Malacca to appear on the JWC’s list may not be that high. In 2005, the JWC added the Strait of Malacca to its war‑risk list based on a disputed report about terrorism threats to regional shipping. The terrorism claims were later discredited, yet premiums still rose to 0.4 percent of hull and machinery value for more than a year. Against this

China’s Malacca Dilemma, After Hormuz

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