China Power | Economy | East Asia

China’s Economy Feels the Iran War Shock

And it was already struggling.

When the United States and Israel launched their first missile strikes against Iran on February 28, the reaction world-wide was shock. The White House had managed not to leak. The press was oblivious. And Iran itself was caught completely off guard, with Supreme Leader Ali Khamenei killed in the first strikes.

It is difficult to imagine that any country was more disconcerted than China. They had miscalculated the American intention on Iran, on a gargantuan level. China should have read the tea leaves. The United states had already neutralized Iran’s nuclear sites with a spectacular bombing raid on June 21, 2025 that decimated the facilities and set Iran’s nuclear bomb development back by years. Venezuela, as well, should have been an example. Despite having heard U.S. President Donald Trump issue numerous warnings to Venezuela not to allow illegal drugs to be shipped to the United States, then-President Nicolas Maduro ignored the messages. Maduro was ultimately captured by U.S. forces and now sits in a New York City jail awaiting trial.

China – like the rest of the world – was caught off-guard by the Israeli-U.S. strikes and the resulting conflict. Beijing’s challenge now is to steer China’s economy around the repercussions – and that challenge is formidable.

Indeed, China’s already stumbling economy is finding its decline exacerbated as the global cost of the Iran-U.S. war continues. China has been in a state of deflation for more than three years. With deflation comes a loss of resilience, the exact quality that the Chinese economy needs right now in order to ward off the global energy shock. Iran is allowing only limited shipments through the Strait of Hormuz, a major artery for the world’s gas and oil – including China’s.

There are those, however, who see opportunities amid the current economic situation in China.

Dr. Zhang Chuchu of Fudan University in Shanghai suggested that the conflict positions China to “reshape” economic cooperation with North Africa, also known as the Maghreb.  In a paper in mid-March, Zhang wrote, “While global attention during the U.S.-Israeli war with Iran has centered on its direct effects on U.S.-China tensions or Beijing’s ties with Gulf capitals, a quieter yet strategically significant realignment has been unfolding across North Africa.”

Zhang stressed that China, which is the largest crude oil importer in the world, has faced “challenges” arising from the closure of the Strait of Hormuz, through which 40-50 percent of its imports by sea generally travel. With Hormuz blocked off by Iran, Zhang argued, Beijing has turned to a “dual-track strategy of multi-source procurement and accelerated green transformation.” 

Of course, shipping to and from China is not completely shut down. Container shipping from China’s East coast, such as Shanghai and Ningbo ports, to the Western Hemisphere – such as the West coast of the United States, in particular Los Angeles –  is unaffected logistically by the chokehold on Hormuz. In some sectors of the economy, and along some of China’s critical import and export routes, China is relatively protected from the trade shocks that are being generated by the military action occurring in the Middle East. 

China’s cost may prove to be lower than some of the other at-risk economies of the world. Beijing has prepared for limited oil disruptions, having stockpiled (some might say hoarded) enough oil to cover demand for at least four months should it prove necessary. 

Oil is China’s greatest vulnerability. A stable, reliable, and low-cost source of oil is critical for China’s overall economic health, and Beijing knows it. It built up the massive oil reserves in the case of just such a crisis – although China may have had the blockade of a different strait in mind. The massive reserve inventory of oil may help the economy over a hump. 

In fact, as the world’s largest manufacturer of electric vehicles (EVs), China may be hoping that at least some of the potential economic toll from soaring oil and gas costs can be offset by a rise in the purchase of EVs, which don’t – at least directly – rely on oil. 

Other analysts are not so sure. Alicia García-Herrero of Bruegel had this to say:

The disruption to global energy flows triggered by the United States and Israel’s attacks against Iran are a severe test of energy security, export resilience and geopolitical strategy for China, the world’s largest oil importer. While Beijing’s massive oil........

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