Summary

China’s Malacca Dilemma, After Hormuz Western-dominated insurance premiums can choke off Beijing’s oil supplies more effectively than warships can. - Get audio access with any FP subscription. ALREADY AN FP SUBSCRIBER? LOGIN 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 precedent, it is easy to imagine the committee treating a war over Taiwan as a direct threat to Malacca. The signing in April of a major defense cooperation partnership between Jakarta and Washington, which expands U.S. access to Indonesian waters and airspace, only raises the likelihood that the strait would be swept into any conflict over Taiwan and lowers the bar for a fresh JWC listing. Beijing is trying to bypass the Malacca dilemma. It has a strategic stockpile of nearly 1.4 billion barrels of oil. It has built overland alternatives—oil pipelines from Myanmar, Kazakhstan, and Russia—with a combined capacity of roughly 1.5 million barrels per day, though that still pales in comparison to the 7.9 million barrels flowing through the strait to China daily. And it can also reroute tankers through the Sunda or Lombok Straits, bypassing Malacca entirely. Those workarounds could help avoid a Malacca-specific meltdown, but they fail to address an even larger, if underacknowledged, threat to China’s oil security. War-destination premiums follow a ship to its port of call, not the waters that it transits. The Ukraine war sets a precedent for how to block oil bound for the Chinese mainland, no matter the route that it takes. The JWC added some Russian and Ukrainian waters, including the Black Sea, to the high-risk list nine days before the full-scale Russian invasion began in 2022. By that April, it had listed all Russian territorial waters, including every Russian port. War‑risk premiums for Russian Black Sea ports peaked at 1 percent-1.2 percent. If China invaded Taiwan, its major oil terminals in Ningbo, Shanghai, and Qingdao could face the same insurance logic. War-risk premiums on a $300 million tanker could jump from a peacetime baseline of $150,000 a year to $3 million, following the Ukraine precedent of 1 percent of hull value. That is a twentyfold increase that few commercial operators would be willing to stomach. One obvious response would be for China to build its own war-risk insurance capacity to bypass Lloyd’s entirely. Beijing is trying to do exactly that by expanding the China P&I Club, a state-backed maritime liability insurer, and supporting the launch of a dedicated Hong Kong war-risk pool to cover Chinese vessels in the Gulf. But the scale of these efforts is not large enough to matter—yet. When the Iran war began, Hong Kong’s entire war-risk pool, backed by five insurers, covered only 10 ships with an underwriting capacity of 1 billion Hong Kong dollars. That works out to about $130 million in U.S. dollars per policy, which could not fully cover the hull value of a single modern oil tanker, which would cost between $200 million and $300 million each to replace. That leaves China’s shadow fleet, believed to comprise some 900 to 1,300 aging tankers flying flags of convenience and insured outside the Lloyd’s system. Adept at mid-ocean ship-to-ship transfers that disguise cargo origins, this fleet is the primary channel through which Russian, Iranian, and Venezuelan crude reaches Chinese refineries. In 2025, it carried an estimated 2.6 million barrels a day into China, about 22 percent of its total imports. In a Taiwan conflict, Beijing would almost certainly try to scale it up. But the shadow fleet is not a solution as much as a vulnerability with extra steps. Rather than chasing individual ships, Washington has been picking apart the inspectors, brokers, flag registries, and banks that keep sanctioned tankers moving. In May 2025, the United States sanctioned CCIC Singapore, a Beijing-linked inspection firm caught falsifying paperwork to disguise Iranian oil bound for Chinese refineries; local banks froze its accounts within days. The same pressure works on the receiving end. In peacetime, China’s state oil majors have often protected their global operations rather than chasing discounted barrels. When Washington sanctioned Rosneft and Lukoil in October 2025, Chinese oil companies Sinopec, CNOOC, and PetroChina halted seaborne Russian crude within weeks, wary of being sanctioned themselves. A U.S. designation does not just stop one cargo; it signals to banks, insurers, and traders that continued business could cost them access to the dollar-based clearing system. In the case of war, Beijing could order its oil giants to ignore those warnings and keep taking sanctioned cargo, but that would likely earn these firms U.S. sanctions themselves. This would make even routine imports from nonsanctioned suppliers, such as Saudi Arabia and the United Arab Emirates, harder to finance and insure, because major banks, shipowners, and insurers would risk violating sanctions by dealing with them. That would force Beijing to lean harder on the shadow fleet, a workaround that only functions if foreign shipowners, brokers, and banks are still willing to move those barrels under sustained sanctions pressure. Washington is betting that few will. China has built the world’s most ambitious green economy while remaining hostage to an old geopolitical vulnerability: the need to move oil across water that someone else controls. The Iran crisis revealed that the real choke point is never simply a strait. It is the insurance market, the sanctions list, and the dollar. Hu worried about warships blocking tankers. What should worry Xi is a Western spreadsheet repricing the risk of moving oil to China at all. Chee Meng Tan is a geoeconomist and assistant professor of business economics at the University of Nottingham Malaysia. He specializes in China’s strategic vulnerabilities and the geopolitics of Southeast Asia and focuses on how great powers weaponize trade, energy, and finance.