TOKYO – Amidst all the smoke surrounding a Chinese slowdown, economists are getting a glimpse of a serious fire this week.
Case in point: exports grew just 2.5% year-on-year in March, a significantly lower rate than the previous few months. It is the clearest indication that the consequences from Iran wasand its impact on energy prices and global demand, is hitting Asia’s largest economy.
From here, risks will “arise from a continued global slowdown in aggregate demand if the conflict drags on longer than currently expected,” say Bank of America economists led by Helen Qiao.
True, there is an argument that China is better able to weather the storm than many top 10 economies. As Qiao points out, the shortage of oil and gas supplies caused by the war in Iran could be a long-term boon for China’s growing renewable energy sector.
“Despite the energy price hit, exports should remain solid in the coming quarters, thanks to strong demand for semiconductors and green technologies,” notes Zichun Huang at Capital Economics.
China has enjoyed cheaper access to oil thanks to close ties with Iran and Russia. Beijing also has a wide range of monetary policy that others do not.
As Gustavo Medeiros, emerging markets analyst at asset manager Ashmore, tells CNBC: “Importantly, the main problem of this crisis was the inability of countries to respond effectively, given very wide fiscal deficits and debt levels and inflation at uncomfortable levels. China has been struggling with deflation greater than its market. There has been less tightening of financial conditions in China than in other countries.”
However, China’s pre-existing conditions are now returning to President Xi Jinping’s economy. A once-in-a-century property crisis continues to undermine consumer confidence. Weak local government finances are limiting the ability of municipalities to invest in deeper social safety nets, pushing households to spend more and save less.
Now, new winds are blowing for China as the global economy weakens amid the Iran war. This week, the International Monetary Fund warned who continued the war in Middle East could cause a global recession.
“The global outlook has suddenly darkened following the outbreak of war in the Middle East,” the fund said in a report on Tuesday. “Prior to the war, we were willing to upgrade our global growth forecast, reflecting continued momentum in the global economy supported by a boom in technology investment, some moderation in trade policy tensions, fiscal support in some countries and an adjustment in financial conditions.”
The IMF slightly cut China’s 2026 growth forecast in 4.4%. However, the combination of weak housing, a declining labor force, slowing productivity and lower investment returns could push 2027 growth to 4.0%.
China’s latest trade data may be a harbinger of things to come. A prolonged Iran conflict—a distinct possibility—would destroy China’s export-led growth model.
As disruptions to tanker traffic through the Strait of Hormuz continue, higher costs of oil, gas, fertilizer and other basic products will be passed on to Chinese producers, pumping up prices and hurting exports.
competition in an uncertain economic moment.
Unlike previous economic cycles, this 2026 scenario brings higher costs and weak domestic demand. It’s a combination that could squeeze profit margins and slow economic growth to below-target levels.
For Xi, the specter of energy-driven cost-driven inflation, mixed with weakening global demand for exports, is a clear and present risk to China’s export-dependent economy.
Although China has significant energy reserves, a protracted war in the Middle East lasting more than six months could destroy profits and corporate profits. GDP growth.
It hardly helps that some economists think the IMF is too optimistic about what’s to come. “The latest IMF forecasts project global GDP growth to slow less this year than our baseline,” says analyst Ben May at Oxford Economics. “This may reflect that the IMF’s forecasts are conditioned on a slightly lower oil price path than ours.”
However, adds May, “they agree with our assessment that the downside risks are large. The higher energy prices rise and the longer they remain high, the greater the likelihood of nonlinear spillover effects.”
May notes that “the severe oil price scenario presents a similar picture to our extended one Iran war scenario published last month. If the price of oil were to average more than $100 per barrel this year, it could push the world economy into recession.
It is clear that the sharp rise in global energy prices is beginning to be reflected in inflation data for March, notes Zazral Purewsuren, an analyst at Fitch Ratings.
Prices rose an average of 0.8% month-on-month in major developed economies where data is available, the biggest monthly increase since 2022, Purewsuren points out. The average increase in the annual rate of inflation across all markets was 0.3 percentage points, with the shock not yet fully passed through to consumer prices.
As such, Purewsuren adds, “Government bond yields have risen across the board as market participants assessed a possible fiscal and monetary response as well as higher inflation.”
Tighter global credit conditions will add to China’s woes. On Tuesday, the Monetary Authority of Singapore became the first Asian central bank to directly respond to the inflationary shock caused by the war in Iran by raising rates. Singapore is often a harbinger of economic pivots to come.
“Past policy episodes illustrate how large swings in global energy prices can affect Singapore’s inflation outlook and, by extension, monetary policy settings,” said strategist Christopher Wong of Oversea-Chinese Banking Corporation.
The decline in China’s exports in March is large, after a combined increase of 21.8% in the first two months of the year. To be fair, as Wang Jun, China’s vice minister of customs, told reporters on Tuesday, the ways in which global oil prices have experienced “wild swings” are creating a “complex and difficult” trading environment that is proving difficult to gauge.
However, there is no doubt that “the uncertainty of the global macro outlook, fueled by the conflict in the Middle East, is likely to have weighed on the demand side” in ways that strain exports, says economist Zhiwei Zhang, CEO at Pinpoint Asset Management.
It’s worth noting, Zhang adds, that Beijing’s overall trade surplus shrank 3% year-on-year to just $264.3 billion. It followed a record high surplus in the first two months of 2026.
The result is that “China cannot fully pass on higher energy prices to foreign consumers,” says Zhang, which is sure to narrow the trade surplus.
It is also worth noting that China Inc. it wasn’t exactly state-of-the-art before the bombs fell on Tehran on February 28. As 2026 unfolds, global investors are watching to see if Xi, in the 14th year of his reign, will act to end the deflation-causing property crisis, reduce transparency, level the playing field so the private sector can flourish, and fund local government. under trillions of dollars in debt and build vibrant social safety nets to encourage households to spend more of their $22 trillion in savings.
Each of these upgrades is challenging enough, never mind several at the same time, in the middle of the war in the Middle East. Or against the backdrop of a government under extreme pressure to meet this year’s official growth rate of 4.5% to 5%.
Achieving an arbitrary number year after year distorts all economic incentives. It forces municipal leaders in China’s 22 provinces to prioritize short-term sugar-level incentives over major reforms to create a more dynamic economy.
This dynamic explains why China it finds it so difficult to break away from rapid, debt-fueled growth. The way local government officials with national ambitions get on Beijing’s radar screen is by producing above-target GDP year after year.
The chances are extremely low that the giant infrastructure projects that municipalities rely on to fuel growth are necessary or productively funded.
Any China must grow better, not just faster, relies on breaking this cycle. Understandably, efforts by Xi and Li Qiang, prime minister since March 2023, to boost the economy have gained traction.
Also, the “Made in China 2025” extravaganza Xi launched in 2015 had quite a year. It aimed to expand China’s footprint in artificial intelligence, biotechnology, electric vehicles, renewable energy, semiconductors and other future technologies.
In 2025, the strategy put some big wins on the scoreboard. Case in point: the incredible success of EV maker BYD and AI sensation DeepSeek. The problem is that the financial system under China Inc’s technological ambitions is being held back by the slow pace of reforms.
As the headwinds now blowing Beijing’s way intensify, Xi’s party is likely to be even more focused on supporting short-term growth than economic restructuring aimed at long-term prosperity.
In this way, the Iran war may be ushering in a lost period for economic reform at a time when China can least afford to waste time.
Follow William Pesek on X at @WilliamPesek
