TOKYO — As Donald Trump’s military escalation strikes Iran, Chinese leader Xi Jinping could be forgiven for asking whether the US president is provoking Beijing on purpose.
Beijing was still reeling from the Venezuela episode when news arrived of a US-Israeli bombardment that killed Iran’s Supreme Leader Ayatollah Ali Khamenei. In January, US forces had removed Venezuelan President Nicolas Maduro and effectively disrupted a relationship in which China had invested at least $106 billion between 2000 and 2023. The Trump administration has since seized control of Venezuela’s oil supply and positioned Washington to run the country.
Now Washington’s actions are straining Beijing’s close ties with Tehran. Before the recent strike, roughly 90% of Iran’s oil exports went to China — about 15% of China’s crude imports. Iran was a pillar of Beijing’s Middle East strategy, cemented by a 2021 25-year cooperation agreement in which China pledged roughly $400 billion in investment.
That explains why Beijing swiftly condemned the US-Israeli operation and demanded an immediate ceasefire. Chinese Foreign Minister Wang Yi called it “unacceptable to openly kill the leader of a sovereign country and institute regime change.”
Trump’s actions are often dismissed as performative rather than part of a grand strategic design. Some US commentators mocked the Iran assault as “Operation Epstein Fury,” a dig at presidential efforts to distract from Trump’s long ties to convicted sex offender Jeffrey Epstein. Still, the real economic fallout for China and the rest of Asia is unfolding in real time.
Oil prices spiked as much as 13%, jumping above $83 a barrel. Iran supplies about 5% of global crude; if its shipments stopped entirely, Bloomberg Economics analyst Ziad Daoud estimates prices could rise by around 20%. If the Strait of Hormuz — a key shipping chokepoint — is closed to tankers, prices might reach $108 per barrel.
Carlos Casanova, an economist at Union Bancaire Privée, notes that geopolitical tensions are emerging while the oil market has been in narrowing backwardation since 2025, a state suggesting supply was outpacing demand and traders expected lower future prices. A major supply disruption would be needed to reverse that trend and force a large oil price surge, though that outcome is uncertain.
A sudden rise in imported inflation would be unwelcome for China’s already imbalanced economy. While Xi might favor the end of deflation, surging energy costs would complicate policy. A prolonged Gulf conflict would force Beijing to replace Iranian barrels quickly, with global repercussions — China remains the world’s main manufacturing hub.
Europe and India are also on edge. The US can temporarily lean on domestic shale production, but China would lose another source of cheap oil. TD Securities analyst Rich Kelly says Russia could gain as Indian and Chinese demand shifts toward discounted Urals crude, relieving some pressure on Moscow from falling Russian oil prices.
The timing is awkward, coming about a month before a planned Trump visit to meet Xi. After recent tariff battles, Xi must decide how to handle the summit. Appearing to tolerate US disruption of China’s relationships with Venezuela and Iran could damage Xi’s standing within the CCP. His military purges, aimed at tightening control over the People’s Liberation Army and the party, reflect sensitivity to perceptions of strength.
Geoeconomically, it’s a delicate balance. A recent US-China truce helped calm markets; renewed tensions between the two largest economies would hurt Asia. A prolonged Middle East war would particularly strain Asian importers of oil and gas. Stefan Angrick of Moody’s Analytics highlights that about a third of global seaborne crude passes through the Strait of Hormuz, with much destined for China, India, Japan and South Korea. This conflict adds uncertainty to trade forecasts.
China has strategic oil reserves that could cushion short-term disruptions, but the situation complicates matters for India, which depends on Middle Eastern oil and had agreed to taper Russian purchases under a US trade deal now imperiled by the US Supreme Court’s striking down of Trump’s country-based tariffs.
Moody’s warns that Asia’s high-income economies — including Hong Kong, Japan, Korea, Singapore and Taiwan — import more than 80% of their energy, leaving them exposed to direct economic fallout from the conflict. The Bank of Japan, already unlikely to raise rates soon, may delay hikes further amid Middle Eastern uncertainties, says Takeshi Yamaguchi, chief Japan economist at Morgan Stanley MUFG. A drawn-out crisis could push back anticipated rate increases later in the year.
Food prices are another vulnerability. Rising commodity costs would feed inflation and complicate central-bank decisions across the region. Emerging Asian economies with heavy external debt burdens — from Bangladesh to Pakistan to Sri Lanka — would be particularly exposed, already strained by fallout from the Ukraine war.
Much depends on the duration and intensity of the standoff. Whether the Strait is physically closed or becomes effectively inaccessible due to risk avoidance, flows will be disrupted. Jorge Leon of Rystad Energy warns that, absent quick de-escalation, markets should expect significant upward repricing of oil.
Historically, investors tend to sell geopolitical risk premia when hostilities begin. Barclays analysts caution that investors, having learned this pattern, may now be underpricing scenarios in which containment fails, raising the danger of large market surprises.
Rising energy costs strengthen the case for Xi’s policy of supporting the yuan; its recent stability produced the currency’s longest winning streak since 2010. Brad Setser of the Council on Foreign Relations says a weak yuan imposes real costs on Chinese consumers and the wider economy, and notes there’s an internal debate in China about the support policy’s merits.
Liu Shijin, a former member of the People’s Bank of China’s monetary policy committee, argues that a “reasonable” appreciation of the yuan would boost purchasing power, domestic consumption and the currency’s global appeal. Stephen Jen, CEO of Eurizon SLJ Capital, foresees the yuan rising to about 6.25 per dollar by year-end, roughly 10% stronger than current levels.
Beijing appears to have moved away from the view that an undervalued currency automatically helps growth, having watched Japan’s long pursuit of a weaker yen. Yet a Middle East war that depresses global demand could make it hard to sustain near-5% Chinese growth, complicating any currency-management strategy.
With US bombs falling on Tehran as Beijing runs through its “Two Sessions” political meetings, the stakes for China’s economy and for Xi’s domestic standing have risen — and the coming weeks will test how Beijing balances geopolitical, economic and political pressures.
Follow William Pesek on X at @WilliamPesek
