Shaken giant
Why the Iran war hurts China less than its rivals
But more than it admits
FOR THE better part of a decade China has repeated the same message to foreigners: unlike certain unmentioned countries pushing for unilateralism and protectionism, China is a force for stability and certainty.
At times this can be a hard sell. But as the globe lurches from the lunacy of Donald Trump’s tariffs to the fallout from his attacks on Iran, Chinese officials are making their pitch to an audience that needs little persuading—and they know it.
Business executives and diplomats who have recently met Chinese leaders report that they seem supremely confident.
This has made for extreme claims about the impact of the Iran war on China’s economic standing.
In the immediate aftermath of the bombing, some of Mr Trump’s boosters asserted that, along with his toppling of Nicolás Maduro in Venezuela, it was part of a plan to hurt China, by undermining its supposed allies and energy suppliers.
The notion that it would be among the biggest losers of the war is glaringly wrong.
But that does not mean the opposite—that China will be the big winner, as some now assert—is obviously right.
Relative harm
The war will hurt China’s economy, not help it, though the damage will be slighter than that inflicted on many of its neighbours and rivals.
The country’s share of global exports, already extremely high, is likely to rise yet more.
But the longer the war drags on, the higher the costs will mount.
Officials do not relish deepening chaos in the Middle East.
The economic effects for the Asian giant span three categories: energy, exports and escalation risks.
Each contains a heady mix of setbacks and opportunities.
The most direct consequence of the war has been an oil squeeze.
But unlike other Asian oil importers, China has more cushioning.
It gets about a third of its crude through the Strait of Hormuz, compared with more than 70% for both South Korea and Japan.
Moreover, oil and natural gas are smaller parts of China’s overall energy mix owing to its reliance on coal, nuclear and rapidly growing renewables.
China also has alternatives to petrochemicals, with big firms that can convert coal to chemicals.
And if shortages get worse, China has oil reserves that are estimated at about four months of seaborne imports.
Advisers in Beijing say the government is, for now, reluctant to tap these reserves, saving them for true worst-case scenarios.
The disruption is affecting costs.
On March 23rd the government raised petrol prices by 13%, causing consternation among ordinary Chinese.
It is scant consolation that the increase in fuel and feedstock costs will help the government to achieve one of its economic goals for the year: lifting inflation into positive territory.
Producer prices have fallen year on year for 41 months in a row, the longest deflationary spell since 2012-16.
A broader measure, the GDP deflator, has dropped for 11 consecutive quarters.
The war may have interrupted both of these grim sequences.
Surveys of manufacturers already point to a sharp increase in raw material prices.
Expensive oil is a painful way out of deflation—far better to be pulled out by strong demand than pushed by higher costs.
Still, rising prices will at least reacquaint Chinese firms and consumers with the idea that prices can go up, helping prevent the “deflationary mindset” that condemned Japan to years of stagnation.
Another question is how the war in Iran will weigh on exports.
Last year China notched up a record $1.2trn trade surplus, driving about a third of its economic growth.
As consumers around the world feel the pinch from rising energy prices, their spending on other goods will fall, and the reverberations will hit Chinese factories.
Economic advisers in Beijing talk about their preference for a stable global trading order.
As the world’s largest exporter, China has a genuine stake in international waters remaining open and cross-border commerce remaining predictable.
Yet the current crisis could eventually boost global demand for China’s “new three” products: electric vehicles, lithium-ion batteries and solar cells.
It is the dominant producer of all three, accounting for at least 70% of global capacity in these sectors.
Each will be more alluring to people and businesses elsewhere if oil prices remain high in the coming months.
Chinese producers will also benefit if some of their target markets are distracted.
Throughout 2025 it looked as if European countries were inching towards more protective measures against the wave of Chinese imports hitting their shores.
Now, as one diplomat puts it, confronting the Chinese manufacturing juggernaut has slipped down the list of priorities.
Forced disruption
If the war turns much uglier or lasts much longer, global economic damage will become increasingly severe.
For China that will pose a dilemma that it has wrestled with for the past five years: when are things bad enough to justify a splashy stimulus programme?
According to economic advisers, Xi Jinping has come to view stimulus, and the accompanying increase in debt, as an economic weakness and even a moral failing.
Far better, the leader thinks, to let businesses and consumers look after themselves than to count on the government for bail-outs.
However, officials are wondering if current policy settings will let China hit its growth target of 4.5-5% for 2026, its lowest since 1991.
The economy seems to have made a good start, with manufacturing and exports both in decent shape.
But the property market has yet to bottom out and consumer confidence remains weak, leaving China counting on an uninterrupted export boom.
If the Iran war weakens that boom by raising shipping costs and damaging trading partners’ confidence, China has options.
It could cut interest rates faster and spend more public money.
As Larry Hu, an economist at Macquarie, an investment bank, puts it, global disruptions determine how China meets its growth target, not whether it does: weak exports prompt more stimulus; strong exports, less.
Faltering trade could even force a more decisive rescue of the property market, boosting household wealth and confidence.
It would also be better for Chinese households, who would get to enjoy more of the fruits of their labour.
Robust domestic demand in the world’s second-largest economy really would be a source of stability and certainty for others.
But for Mr Xi, intent on transforming his country into an unparalleled technological power, not a decadent consumerist economy, it would be an unwelcome shift in strategy.
It would be ironic if Mr Trump’s reckless war, which has thrown world markets off kilter, ends up making China’s economy more balanced.
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