TOKYO — As Donald Trump’s military strike on Iran escalates tensions, Chinese leader Xi Jinping could be forgiven for seeing the move as a direct jab at Beijing.
Beijing was still reeling from the US seizure of Venezuela’s president and assets when a US-Israeli bombardment killed Iran’s Supreme Leader Ayatollah Ali Khamenei. Earlier this year the US operation that detained Venezuelan President Nicolás Maduro disrupted a relationship in which China had invested at least $106 billion from 2000 to 2023, giving Washington control over Venezuela’s oil supply. Now the Trump administration appears to be undermining China’s close ties with Tehran, too.
Before the strike, roughly 90% of Iran’s oil exports went to China, representing about 15% of China’s crude imports. Iran was central to Beijing’s Middle East strategy under the 2021 25-year cooperation agreement, which pledged up to $400 billion in Chinese investment. No surprise, then, that China quickly condemned the attacks and called for an immediate ceasefire; Foreign Minister Wang Yi said it was “unacceptable to openly kill the leader of a sovereign country and institute regime change.”
Some US critics mocked the Iran operation as “Operation Epstein Fury,” suggesting the move was meant to distract from domestic controversies. Regardless of motive, the economic fallout is being measured across Asia and beyond.
Oil prices jumped as much as 13%, topping $83 a barrel. Iran supplies about 5% of global oil; Bloomberg Economics analyst Ziad Daoud warns prices could rise about 20% if Iranian shipments stop entirely, and a shutdown of the Strait of Hormuz might push prices to $108 per barrel. Carlos Casanova of Union Bancaire Privee notes that the oil market had been in narrowing backwardation since 2025, implying supply had been outpacing demand; a major supply disruption would be needed to reverse that trend and trigger a sustained spike in prices.
A sharp rise in oil costs would hit China’s already unbalanced economy. While ending deflation might be welcome, a sudden surge in imported inflation would be unwelcome. A prolonged Gulf conflict would force Beijing to replace Iranian crude quickly, with ramifications for global supply chains—China remains the world’s factory floor.
Europe and India are also exposed, though the US can temporarily rely on its shale industry. TD Securities’ Rich Kelly says China would “lose another source of cheap barrels,” and that Russia could benefit as Indian and Chinese demand shift toward discounted Urals, easing some pressure on the Kremlin from lower crude pricing.
The timing is awkward, coming about a month before a planned summit between Trump and Xi. Xi faces a difficult political balance: appearing weak in the CCP for not responding to Washington’s disruption of China’s ties with Venezuela and Iran could undermine his authority, especially after recent military purges intended to consolidate his control over the PLA and the party.
Geoeconomically, renewed US-China friction would increase market volatility—bad news for Asia, which buys most of the region’s oil and gas. Stefan Angrick of Moody’s Analytics points out that about a third of global seaborne crude passes through the Strait of Hormuz, much of it destined for China, India, Japan and South Korea. That injects fresh uncertainty into trade prospects. China’s strategic reserves could cushion short-term disruptions, but India faces complications: it imports large quantities of Middle Eastern oil and had agreed to reduce Russian purchases under a US trade deal now in limbo after the US Supreme Court struck down Trump’s country-based tariffs.
Asia’s high-income economies, heavily reliant on imported commodities, are particularly vulnerable. Moody’s estimates that Hong Kong, Japan, Korea, Singapore and Taiwan import more than 80% of their energy. The Bank of Japan’s already low probability of raising rates in the near term looks even less likely amid heightened Middle East uncertainty, says Takeshi Yamaguchi of Morgan Stanley MUFG; a possible June hike could be postponed further if tensions persist.
Food prices add another layer of vulnerability. Rising commodity costs would fuel inflation and complicate central bank decisions across the region, while emerging Asian economies with heavy external debt—Bangladesh, Pakistan, Sri Lanka—would face added strain from simultaneous energy and food price shocks.
How severe the economic impact becomes depends on the duration and intensity of the conflict. Jorge Leon of Rystad Energy warns that whether the Strait of Hormuz is closed by force or made inaccessible through risk avoidance, the result on flows is similar and would likely prompt an immediate upward repricing of oil. Barclays analysts caution that investors often sell the geopolitical risk premium when hostilities begin; their concern is that markets may now be underpricing a scenario in which containment fails.
The risk of higher energy prices bolsters Beijing’s recent policy to support the yuan, which has enjoyed its longest winning streak since 2010. Brad Setser of the Council on Foreign Relations notes that a weak yuan imposes real costs on Chinese consumers and the broader economy, and that internal debates about exchange-rate policy are significant. Liu Shijin, a former People’s Bank of China monetary policy committee member, says a “reasonable” appreciation would boost purchasing power and consumption while enhancing the currency’s global appeal. Stephen Jen of Eurizon SLJ Capital predicts the yuan could strengthen to about 6.25 per dollar by year-end, roughly 10% above current levels, reflecting Beijing’s aversion to an undervalued currency and the “vicious circle” it can create.
Still, if war in the Middle East saps global demand, keeping Chinese growth near 5% will be harder and managing the yuan will be more complicated. As US bombs fall on Tehran, Beijing’s Two Sessions political meetings are unfolding under heightened economic and geopolitical pressure.
Follow William Pesek on X at @WilliamPesek
