How Is the Iran War Impacting China’s Economy?

By: Bonny Lin, Brian Hart, Leon Li, Truly Tinsley, Linda Yang

April 30, 2026

Since the start of the war in Iran on February 28, 2026, the conflict and ensuing disruptions of the vital Strait of Hormuz have sent ripple effects reverberating throughout the global economy. The conflict poses major geoeconomic implications for China, the world’s second-largest economy and an important player in the Middle East.

This report analyzes the most important economic impacts on China, with a focus on declining demand for Chinese exports, China’s exposure to global energy market shocks, supply chain disruptions, and threats to Chinese investments. It shows that while China is better positioned than many economies to weather the storm, the Iran war threatens China’s economy in key ways.

Key Impacts of the Iran War on China:

• Reduced Demand for Chinese Exports: The Iran war is harming almost all economies, many of which rank among China’s top export markets. Given China’s deep and growing reliance on export-led economic growth, depressed demand for Chinese goods could undermine China’s macroeconomic prospects in 2026.
• Energy Disruptions: China faces significant energy disruptions from the war in Iran, with over one-third of its crude oil supply transiting the Strait of Hormuz each year. However, China is more insulated than most economies due to its strategic energy reserves, diversified foreign energy supplies, domestic energy alternatives, and its higher electric vehicle adoption rate.
• Supply Chain Challenges: The rising costs of energy and other critical inputs are putting pressure on China’s immense industrial sector. Price shocks are eroding producer profits and depressing already-low domestic demand. However, other countries are feeling the pain as well, and Chinese manufacturers could leverage their relative strengths to outcompete other global players in the long-term.
• Investment Risks: The Middle East region was the top global destination for Chinese investment in 2025—especially amid a rise in technology investments in wealthy Gulf countries. The war poses direct threats to China’s existing investments in the region and could undermine overall confidence in future investments there.

Reduced Demand for Chinese Exports

The Iran war has triggered one of the largest energy disruptions in history, with knock-on impacts battering the global economy. Brent crude oil prices climbed from an average of $71 per barrel in February to an average of roughly $100. Liquefied natural gas (LNG) prices have jumped too, reaching nearly $21 per million British thermal units (Btu) in Asian markets in March 2026—up from $13 per Btu in March 2025.¹ Dozens of countries have responded with emergency measures to ration energy use and shield their citizens from price shocks.

 

This turbulence has direct implications for China’s energy security (as discussed in the following section), but the most daunting challenge for China is likely to come from reduced demand for Chinese goods due to the broader global economic fallout.

When the International Monetary Fund (IMF) issued its World Economic Outlook in April 2026, it revised downward global GDP growth forecasts for 2026 to 3.1 percent from the latest 3.3 percent pre-war estimate in January 2026. This included a slight downgrade in China’s forecasted 2026 GDP growth rate, from 4.5 percent to 4.4 percent.

In a troubling sign for China, the IMF also downgraded its forecasts for global imports, especially among developing economies. Among China’s top 20 export markets, eight saw their forecasted import growth rates slashed, including India, Malaysia, Thailand, Indonesia, Singapore, the United Arab Emirates (UAE), the Philippines, and Saudi Arabia. Some of these saw dramatic drops. The UAE, for example, was previously forecasted to see its imports grow by 7.1 percent in 2026, but now its imports are expected to shrink by 8.4 percent.

 

This could pose a tough challenge for China as its economic growth has become increasingly dependent on ever-growing exports to the global market. In 2025, nearly one-third of China’s GDP growth came from net exports—the highest level since 1997.

Declining global demand for Chinese goods could set China’s GDP growth back further. China already softened its GDP growth target to a range of 4.5 to 5 percent during the March convening of its annual Two Sessions—the lowest target since 1991. The turbulence from the Iran war could create a particularly challenging international environment for China to meet its goals.

 

There is a potential silver lining here for China in the long-term. The war’s unprecedented shock to fossil fuel energy markets may increase the global appetite for green energy technologies, where China has achieved unparalleled dominance. For example, China has accumulated a staggering 91 percent share of global manufacturing capacity in solar panels and a similar 89 percent share for lithium-ion batteries. Elevated global demand for Chinese green technology could partially offset the potential impacts of declining demand for overall Chinese exports.

However, these upside effects are likely to be limited. Green technology exports accounted for less than 6 percent of China’s overall exports in 2025, according to China’s customs data. China also suffers from chronic overcapacity in these industries, hosting far more production capacity than the world demands. China’s solar capacity, for example, can already meet nearly double the current world demand. Thus, although any growing demand will be welcomed by Chinese producers, the overall impact may be muted.

Energy Disruptions

While declining global demand presents the greatest long-term challenge for China, the most acute short-term pain is being felt in energy markets. The Strait of Hormuz is the conduit through which one-fifth of the world’s supply of oil and LNG flows each year.

As the world’s largest oil and LNG importer, China is heavily reliant on the strait. In the first quarter of 2025, China imported 5.4 million barrels of crude oil per day through the strait, which was slightly more than India, South Korea, and Japan combined. China also imported about 23 percent of all LNG flowing through the strait during that period.

 

Chinese authorities have made clear that China faces problems due to the war. In a rare move signaling Beijing’s frustration, Chinese leader Xi Jinping indirectly sided against Iran in telling Saudi Arabia’s Crown Prince and Prime Minister Mohammed bin Salman that the Strait of Hormuz “should maintain normal passage.” Chinese Foreign Minister Wang Yi also reportedly told his Thai counterpart that China has 70 of its own vessels stranded behind the Strait of Hormuz that it is struggling to get free.

Chinese experts have raised alarm bells as well. International relations scholar Shen Dingli said the conflict “deeply undermines China’s energy security.” Another Chinese economist, who was previously a government official, warned that the war “has triggered commodity price fluctuations that have had systemic, greater-than-expected, and recurring impacts on China’s economy.”²

Indeed, the war has already had measurable impacts on China’s economy. Retail gasoline prices in China rose 39 percent from early March to mid-April, and LNG prices increased by 42 percent, according to data from China’s National Bureau of Statistics. The surge in gasoline prices in China’s market is unprecedented, surpassing even the spike after Russia’s 2022 invasion of Ukraine, when gasoline prices rose by 25 percent between early February and March.

 

Notwithstanding the economic pain, there are several reasons why China is better positioned than many economies to weather the energy shocks.

1. Chinese authorities have mechanisms to blunt the costs of price increases within the domestic market.

China’s record-breaking gasoline price increases could have been even steeper, but Chinese government price regulators have kept domestic prices artificially lower, with some support from state-owned energy companies, which have absorbed some of the costs. By late April, Chinese regulators actually reduced gasoline and diesel prices for the first time since the start of the war, even as crude futures climbed globally.

Key to China’s ability to put a ceiling on price increases is the country’s strategic oil reserves, which are the largest in the world at around 1.4 billion barrels as of December 2025. That is enough to cover roughly four months of China’s net crude import demand.³ While large, that is less than U.S. reserves, which are equivalent to about 5.6 months of net imports and only slightly more than Japan’s reserves (about 3.4 months). Taiwan also reportedly has enough to cover 140 days, or about 4.5 months. Notably, China also has substantial strategic stockpile capacity for natural gas, and Chinese authorities have for years focused on building up their gas storage capacity.

 

2. China is less reliant than many other economies on imports of oil and gas through the Strait of Hormuz as a percentage of its total supply.

China has pursued an intentional strategy of diversifying its oil suppliers. According to ChinaPower estimates, about 50 percent of China’s foreign crude oil imports passed through the Strait of Hormuz in 2025.⁴ When factoring in the crude oil that China produces domestically using the latest available data, about 36 percent of China’s total crude oil supply passed through the strait in 2024.⁵

Comparatively, Japan relied on the strait for about 93 percent of its crude oil imports in 2025, and neighboring South Korea (70 percent) and Taiwan (58 percent) were also heavily reliant on the region.⁶ Unlike China, these other large East Asian economies relied almost entirely on imports for their domestic supply.

Notably, India was less reliant than China on the strait for its crude oil imports but more reliant on imports for its total domestic crude oil supply. It has diversified away from the Gulf regions in the past few years, reducing its reliance on crude oil through the strait from 50 percent of its crude oil supply in 2022 to 40 percent in 2024, due to increased imports of discounted Russian crude.

The United States and Europe were far less dependent on oil from the Middle East. Thanks largely to the “fracking revolution,” the United States surpassed Saudi Arabia in 2018 to become the world’s top crude oil producer. The United States primarily relied on Canada to meet demand not met by its own domestic industry. The European Union (EU) had likewise largely diversified away from the Middle East, importing just 13 percent of its crude oil imports through the Strait of Hormuz in 2025. Instead, the EU relied mostly on crude oil from the United States, Norway, and a few other suppliers.

Importantly, the greatest threat from the war is not directly losing access to oil but overcoming price shocks. Crude oil production is globally distributed, and oil markets are relatively fungible, meaning that oil refiners around the world can switch crude oil suppliers. However, economies that do rely more heavily on Gulf countries for crude oil face greater obstacles to quickly finding alternative suppliers, as they have to replace a larger share of their overall supply.

Natural gas markets are more complicated, as production is more concentrated, and markets are more regional and less fungible. Due to the costs of storing and shipping LNG, purchases are typically based on long-term contracts, making it harder to switch from major suppliers on short notice. That means even lower levels of percentage reliance on LNG suppliers affected by the war can pose significant problems.

When it comes to natural gas, China was reliant on the strait for about 30 percent of its natural gas imports in 2025. Data on China’s total natural gas consumption is not available yet for 2025, but in 2024 about 7 percent of China’s total supply passed through the strait.⁷ In 2024, China produced about 60 percent of its natural gas supply domestically and obtained much of its LNG by sea from other suppliers, including Australia, Malaysia, Russia, the United States, and others.

China also receives much of its natural gas via overland pipeline, rather than through liquefied transport by sea. Much of this pipeline natural gas (PNG) arrives in China through the Central Asia-China Gas Pipeline, which spans Turkmenistan, Uzbekistan, and Kazakhstan, as well as from Russia, through the Power of Siberia Pipeline.

Other Asian economies are more vulnerable. India was reliant on the strait for 59 percent of its natural gas imports in 2025, and it lacks access to overland gas pipelines. There is a substantial volume of natural gas production within India, but the strait still provides passages for more than a quarter of India’s natural gas supply. South Korea is also reliant on the strait for about one-fifth of its natural gas supply, but it is somewhat cushioned against shocks, with a storage capacity of at least 52 days of natural gas.

Taiwan is more exposed. The island relied on the strait for about 35 percent of its total gas imports in 2025, and it only has about 12 days of gas reserves.⁸ But Taiwan’s companies are working to develop more storage. The publicly owned petroleum giant CPC Corporation and electricity company Taipower Company are working to triple LNG terminal and storage capacity to meet the legal storage requirements of 14 days by 2027.

Japan is in a better position with respect to natural gas. Like China, it imported 6 percent of its natural gas through the Strait of Hormuz in 2025. Instead, Japan procures much of its gas from Australia, Malaysia, and Russia. Japan also reportedly maintains about three weeks of gas stockpiles—about twice as much as Taiwan.

Europe is far less reliant on natural gas transiting the strait, which made up merely 8 percent of its natural gas imports in 2025. Prior to 2022, nearly half of EU natural gas imports came from Russia. However, it has since substituted Russian gas with U.S. gas, with the U.S. share of EU imports growing from 6 percent in 2021 to 26 percent in 2025.

3. China has other domestic sources of energy to offset the rising costs of oil and gas.

Just as Beijing has intentionally diversified its foreign suppliers, it has also diversified the types of energy products that fuel China’s economy. Particularly important is coal, an energy source for which China has its own deep reserves. About 56 percent of China’s total primary energy supply came from burning coal in 2024, while oil and gas only amounted to 18 percent and 9 percent, respectively. The difference is even more stark when it comes to electricity generation: in 2024, China generated 58 percent of its electricity from coal and only 3 percent from gas and oil.

China’s recent progress in expanding renewables and nuclear energy has been particularly important in terms of displacing oil and gas. China installed nearly half the world’s solar and wind energy capacity in 2024. It is also expanding its nuclear power capacity at a rapid speed and is poised to generate 10 percent of its electricity by nuclear power in 2035, up from 4.5 percent in 2024. Overall, wind, solar, and nuclear energy contributed to more than 22 percent of China’s electricity generation in 2024.

In comparison, the share of electricity generated by oil and gas was 44 percent in Taiwan, 34 percent in Japan, and 29 percent in South Korea. India, like China, relies much more heavily on coal for about three-fourths of its electricity generation. However, the combination of its high reliance on the Gulf region for its oil and gas supply and the outsized role of oil and gas in India’s transportation and industry sectors makes the Indian market more sensitive to supply shocks in oil and gas.

4. China’s comparatively wide adoption of electric vehicles (EVs) reduces the direct impact of oil price spikes on many Chinese consumers.

Consumers most directly feel rising oil prices when filling their cars’ gasoline or diesel tanks. Chinese authorities are acutely aware of this and have sought to limit increases in gasoline prices. Nevertheless, since the start of the war, China’s National Development and Reform Commission has repeatedly raised the national price of gasoline, including the largest single rise in retail gasoline prices since the commission started adjusting prices every 10 days in 2013.

China is not alone in facing rising gasoline prices, but what sets China apart from many other countries is its rapid adoption of EVs, which helps shield some consumers from rising gasoline prices. As of 2024, about 11 percent of passenger vehicles in China were EVs. While China lags some leading EV adopters like Norway (32 percent), Iceland (18 percent), Denmark (17 percent), and Sweden (13 percent), it is well ahead of others. EV adoption sits at just 3 percent in South Korea and the United States, and just 1 percent in Japan.

According to estimates, China’s adoption of EVs has already reduced the country’s demand for oil by roughly 1 million barrels per day in 2024—far more than in other economies.⁹ As EV adoption continues, it is projected to reduce China’s oil consumption by about 2 million barrels per day by 2030.

Supply Chain Challenges

The Iran war is not just hurting customers at the gas pump. The conflict is spilling over into broader Chinese supply chains. Ballooning energy and commodity prices are raising the costs of manufacturing, eroding producer profits, and raising prices for consumers.

China is by far the world’s leading manufacturer, producing about 28 percent of the world’s value-added goods. Producing those goods requires massive amounts of energy. In 2023, China’s manufacturing sector alone consumed over 95 exajoules of energy—an amount that is comparable to the total energy consumption of the entire U.S. economy.

Higher energy prices have direct impacts on energy-intensive industries. China’s fuel refinery industries saw an 8.5 percent increase in producer prices from January to March 2026, and chemical producers saw a roughly 3 percent increase in prices over the same period. Since March, China has cut exports of refined energy products to attempt to protect domestic supply and curb producer price hikes.

Looking beyond just the impacts from energy prices, several key Chinese industries also face immediate and long-term headwinds due to commodity supply chain disruptions caused by the war. Three specific cases are examined below.

Semiconductor Manufacturing

Chipmaking is an industry that is indispensable to Beijing’s push to lead in advanced technologies. The complex process of producing chips requires a vast array of materials, the loss of which can shut down production lines.

One such material is helium, which is derived as a byproduct of processing natural gas. Helium is used in several steps of the chipmaking process, with the global semiconductor industry accounting for roughly one-quarter of global helium use. The gas is also used in medical imaging devices and scientific research, among other applications.

China is critically reliant on imports to supply about 85 percent of its demand for helium. About half of this comes from Russia, while the other half comes mostly from Qatar. The war in Iran has not yet immediately cut off downstream industries because specialized cargo ships carrying helium often take weeks to reach their destination, but helium’s spot price has spiked due to the war. If the war persists, Qatari sources are warning that the effects could be felt long into the future as natural gas processors work to bring production back online.

Another material, naphtha, is also at risk of posing problems for China’s chipmakers. Naphtha serves as an important feedstock for producing chemicals and solvents that are vital for processing the ingredients that make up a semiconductor, as well as for components and insulating compounds that make up the chip itself.

China is a net importer of naphtha, leaving it exposed to disruptions. Although China does produce naphtha domestically, it primarily does so through the process of refining imported crude oil, meaning that price increases and disruptions of crude oil risk creating a cascading series of problems that raise the costs of naphtha. This can in turn raise the costs of chip manufacturing.

Chipmakers in Taiwan, the leading global manufacturer of advanced semiconductors, are also under pressure. The island relies on Qatar for most of its helium supply, and it also has no helium stockpiles. It also relies on imported naphtha, but is less directly impacted by the war, given that it shifted its sourcing of naphtha imports from the Gulf to Russia in recent years. 

Agricultural Sector

China’s agricultural sector is also being impacted by the war, owing to the Middle East’s important role in supply chains for pesticides and fertilizers.

Nearly all production of synthetic pesticides involves chemicals produced by petrochemical companies using fossil fuels. The war’s impacts on Middle Eastern petrochemical companies led to a rapid 46 percent increase in China’s domestic prices for pesticides from early February to mid-April.

Fertilizers are facing price fluctuations as well. Fertilizers are made with minerals and chemicals such as sulfur, nitrogen, phosphate, and potassium. Gulf states account for more than a fifth of global sulfur production and half of global seaborne sulfur trade. They also export a third of the global seaborne urea trade, a fifth of the global ammonia seaborne trade, and a fifth of the global phosphate seaborne trade.

The disruptions to the strait have led to soaring global fertilizer prices. In China, domestic prices for sulfuric acid, a key ingredient in phosphate and ammonium sulfate fertilizers, have climbed 72 percent from early February to mid-April.

China, one of the largest fertilizer producers and consumers in the world, has responded to the supply crunch by restricting exports of nitrogen-potassium fertilizers, adding to China’s existing export control measures on select fertilizers since the start of the Ukraine War. These measures are aimed at keeping domestic prices low to mitigate turbulence within China’s market.

For many countries, this crisis has emphasized China’s willingness to pursue its self-interests at the expense of others. Withholding exports of these goods is raising fertilizer costs for other countries, including important Chinese partners like Brazil, Indonesia, Thailand, and Malaysia. India is facing challenges as well, as its outsized reliance on Qatari LNG for nitrogen-based fertilizer production has precipitated the doubling of its domestic urea spot prices since the war began.

Plastics

Another important Chinese industry—plastic manufacturing—is being impacted. Nearly 99 percent of plastics are produced with petrochemicals and petrochemical feedstocks, such as naphtha and benzene, that are derived from crude oil and natural gas. 

This presents a troubling scenario for China, the world’s largest producer, exporter, and consumer of plastics. As Chinese petrochemical firms face price shocks from energy disruptions, plastic producers have come under pressure to reduce output or raise prices. From early February to mid-April, the price of polypropylene—a ubiquitous plastic used in pipes, food containers, medical devices, car parts, and other essential goods—surged 40 percent in China.

The rise in plastic producer prices has led to shortages in China and its neighboring economies. In industrial regions in China, warehouses and factories are sending trucks to line up to secure plastic supplies for wrapping and assembly. China is not alone in this. In Japan, for example, the government is aiming to release about a tenth of its 500 million reserves of plastic medical gloves as glove shortages spread across the country.

Overall Impacts on China

These various disruptions could further exacerbate structural issues within China’s economy, for both consumers and producers. In March, rising prices resulted in the first year-over-year increase in China’s producer price index (PPI) since September 2022.¹⁰ Chinese policymakers have sought such an uptick in inflation following years of deflationary pressure, but they hoped to achieve this through growing domestic consumption (demand-pull inflation), not increased producer prices (cost-push inflation).

Rising producer prices for goods could further dampen domestic consumption, weighing on China’s overall growth and economic health. There is already evidence that this is happening. China’s retail car sales—a key barometer of consumer sentiment—plummeted 26 percent year-over-year in the first 19 days of April 2026. This may be partly the result of declining EV sales after government tax incentives ended in December 2025, but purchases of gasoline-powered cars fell even more sharply, by nearly 40 percent.

If problems in the manufacturing sector persist, it could have trickle-down effects. In February 2026, about 34 percent of manufacturing firms above a designated size in China were already loss-making.¹¹ If shrinking profits lead to widespread layoffs, it could present a major political and social problem for Chinese leaders, as the manufacturing sector employs around one-fifth of the population, according to the latest census data in China.

It is worth noting that China could reap some relative, long-term benefits from the ongoing economic tumult. China’s advantage on the energy security front (discussed above) may offer it cost advantages in manufacturing compared to competitors like Japan, South Korea, and Taiwan. As some Chinese experts have noted, even though China faces absolute cost increases, its relative cost-effectiveness may make it more competitive. Nevertheless, the short-term shocks from the war currently outweigh any potential upsides for China.

Investment Risks

In response to U.S. and Israeli strikes, Iran retaliated against not just U.S. and Israeli forces but also energy infrastructure, civilian areas, and U.S. military sites in Bahrain, Iraq, Jordan, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE. Iran’s escalation has put at risk billions of dollars of investments in the region, including Chinese investments.

The United States stands to lose much from Iranian attacks. In the early days of the conflict, Iran struck two AWS data centers in the UAE and another in Bahrain, causing extensive disruptions. Iran threatened to do more, publishing a list of 29 “tech targets” that it could strike across the region, which included sites belonging to or associated with U.S. tech giants AWS, Google, IBM, Microsoft, Nvidia, Oracle, and Palantir.

Chinese-linked infrastructure has been affected as well. In 2025, the state-owned China Communications Construction Company signed a $4 billion contract with Kuwait for engineering, procurement, and construction work on the first phase of the Mubarak Al-Kabeer Port. Months later, in March 2026, Iran struck the port with drone and cruise missiles, causing damage to facilities there.

Beyond this initial tumult, the war could have long-term impacts on a range of Chinese investments across the Middle East—not just from direct attacks on infrastructure but also from diminished confidence and stability in the region.

China ranks among the largest foreign investors in the region, accounting for about 17 percent of total foreign direct investment (FDI) into Gulf Cooperation Council (GCC) economies in 2024. And the region is important for China: in 2025, the Middle East proved to be the top regional destination for Chinese investment globally, with at least $26 billion worth of FDI and construction projects inked by China that year.

This follows years of investment across the region. Between 2013 (Xi Jinping’s first year as China’s leader) and 2025, China signed $221 billion worth of investment and construction contracts with countries that have been involved in the conflict.¹² Saudi Arabia, the UAE, and Iraq have attracted the largest total value of Chinese projects among the affected economies.

The lion’s share (54 percent) of Chinese contracts with these countries have been in the energy sector, but recent years have seen a new emphasis on technology investments. In January 2025, China’s Lenovo invested nearly $2 billion in Saudi Arabia to construct a large computer and server assembly plant. A few months later, Tencent pledged a $150 million investment in the kingdom to establish its first data center and cloud region in the Middle East.

Outside of wealthy GCC countries, China also stands to lose with respect to Iran itself. In 2021, Beijing and Tehran signed an agreement, which includes a Chinese pledge of up to $400 billion of investment in Iran over the following 25 years. Implementation of that agreement has been lacking: even before the 2026 war, Chinese companies were hesitant to openly invest in Iran due to U.S. sanctions concerns.

Yet Chinese investments have trickled in. China reportedly secretly funneled up to $8.4 billion in oil payments in 2024 to finance Chinese infrastructure projects in Iran. The same year saw Chinese and Iranian companies reaching a $1.2 billion investment deal for a solar power plant in Iran. China has also expanded investment in railways connecting Iran and China. Weeks before the Iran war, China was still releasing procurement notices related to projects in Iran.

China’s investments in Iran could face major headwinds going forward. Notably, a month into the Iran war, China announced that it had established a new bureau to oversee, optimize, and better secure FDI made by state-owned enterprises. The planning for the bureau was likely underway well before the war, but its establishment may indicate a shift toward greater scrutiny over the approval and monitoring of state-led investments abroad, which could be informed by the war in Iran going forward.

Conclusion

Overall, the Iran war poses a range of challenges for China’s economy. The war is weighing on global demand, which could stifle China’s export-driven growth, and the unprecedented energy and supply chain shocks are already causing major headaches for Chinese producers and consumers. The war could also undermine China’s long-term investments in the Middle East.

Nevertheless, China is better positioned than many of its neighbors to weather some of these challenges in the short-term. There are even some potential upsides for China. Its relative energy security could help its manufacturers outcompete rivals in other countries in the medium term, and heightened global demand for renewable energy could further advantage China.

The authors would like to thank Gerard DiPippo and Jane Nakano for providing helpful feedback on a draft of this report. Any errors are the responsibility of the authors.