Morgan Stanley's Chief China Economist Xing Ziqiang shared his latest analysis on the global macroeconomic landscape at a closed-door meeting today (March 2), focusing on U.S.-Iran military actions and the geopolitical competition surrounding artificial intelligence.

Regarding the U.S.-Iran conflict, Xing views the current situation as an impact on crude oil supply efficiency rather than a complete supply disruption. While short-term risk premiums are surging, the medium- to long-term effects are relatively manageable and unlikely to trigger global stagflation.

Although shipping through the Strait of Hormuz has stalled and insurance premiums have soared, reducing global daily oil supply by 2-3 million barrels, the probability of a long-term blockade remains low. This supply gap could push oil prices to around $80 per barrel, representing a controlled concern rather than panic-driven pricing.

On one hand, OPEC retains some capacity to increase production. On the other, China has built substantial crude oil reserves over the past two years while prices were favorable. Overall, Xing believes this price shock will be significantly shorter-lived than the impact of the Russia-Ukraine war on oil prices in early 2022.

Xing emphasized that AI has become deeply embedded in international rivalries, extending beyond military applications to various aspects of global competition. AI competition has transcended pure commercial spheres to become a central element of geopolitical strategy.

The U.S. is attempting to establish a "Silicon Peace" agreement to form a technology alliance centered around itself, where allies gain access to advanced AI models by integrating into the U.S. ecosystem, though concerns about data sovereignty and model openness persist. This strategy somewhat replicates the post-WWII U.S. dominance pattern from dollar to military hegemony, positioning AI as new global strategic infrastructure.

While China's AI development benefits from lower computing costs, success in large models and token exports requires more than just cost advantages. Historical lessons from 5G development show that data security and geopolitical considerations remain crucial for international market acceptance.

In the short term, attention should focus on companies and sectors controlling physical bottlenecks and irreplicable elements, such as advanced processes in core hardware, HBM memory technology, and optical communication technology. Long-term, data security will ultimately determine competitive outcomes.

Regarding oil market impacts, the Strait of Hormuz disruption has caused tanker delays and reduced effective shipping capacity, though satellite imagery shows no physical infrastructure damage. The situation aligns with earlier predictions of significant productivity impacts for oil transport from the Gulf region.

Both the U.S. and China possess buffers against oil price shocks. The U.S. maintains energy self-sufficiency, while China accumulated substantial crude reserves during periods of lower prices. OPEC members like Saudi Arabia and UAE have announced production increases to partially mitigate the impact.

A $10 per barrel oil price increase would raise global CPI by 0.3-0.7 percentage points while reducing global GDP by 0.1-0.2 percentage points. Asian economies would experience varied effects, with Indonesia, Malaysia and Thailand seeing larger CPI impacts (0.9, 0.8 and 0.7 points respectively) compared to smaller effects in China, Japan and Hong Kong (under 0.3 points).

The Federal Reserve's broader rate-cutting trajectory remains unchanged despite short-term inflation concerns from oil prices, as core U.S. inflation continues to be driven by services and wages. Developed Asian central banks will likely tolerate inflation increases without tightening policies, while emerging markets like Indonesia and India may delay planned rate cuts due to greater inflation sensitivity.

The evolution of AI competition into a core geopolitical tool means countries must balance technological capabilities against dependence on U.S. systems. If U.S. AI models and toolchains become global standards, they could create policy leverage similar to the dollar's post-war dominance in payment networks.

For China's token export ambitions, electricity cost advantages alone cannot guarantee global market success, as data security concerns mirror challenges faced in 5G equipment adoption. Historical patterns suggest geopolitical and security considerations will significantly influence acceptance.

Investment implications highlight near-term focus on energy security for AI computing power, while long-term opportunities lie in data security. Investors should prioritize companies controlling physical constraints and unique elements in the AI competition landscape, moving beyond simple labor-matching platforms.

Advanced manufacturing processes, HBM memory technology, and optical communication represent key hardware bottlenecks, while efficient cooling systems, transformers, backup power, data centers and power access facilities constitute critical physical infrastructure constraints.