TOKYO — As Donald Trump’s military adventurism hits Iran, Chinese leader Xi Jinping could be excused for wondering if the US president is trolling him.
After all, Xi’s Chinese Communist Party (CCP) was still smarting over Venezuela when news broke of a US-Israeli bombardment over the weekend that killed Iranian Supreme Leader Ayatollah Ali Khamenei.
Back in early January, it was Beijing’s most important Latin American partner that got trumped. When the US military spirited Venezuelan President Nicolas Maduro into a New York jail, it upended a relationship that China had invested at least US$106 billion in between 2000 and 2023. Trump World has since commandeered Venezuela’s vast oil supply and positioned Washington to “run” the country.
Now the Trump administration is upsetting Beijing’s tight bond with Tehran. Before this weekend, roughly 90% of Iran’s oil found its way to Xi’s economy — or around 15% of China’s crude imports. Iran was a cornerstone of China’s Middle East, rooted in a 25-year cooperation agreement signed in 2021 in which Beijing committed to invest $400 billion in the Islamic Republic.
All this explains why Xi’s government was so quick to condemn the US-Israeli attacks and call for a ceasefire. Chinese Foreign Minister Wang Yi called it “unacceptable to openly kill the leader of a sovereign country and institute regime change.”
Of course, Trump World isn’t known to play four-dimensional chess. Rather than a multi-pronged plan to weaken Beijing, many US politicos were quick to label the Iran strike “Operation Epstein Fury.”
It’s a play on “Operation Epic Fury” and the Trump administration’s efforts to distract voters from Trump’s longtime association with convicted sex offender Jeffrey Epstein. Still, the real-world fallout for China and the rest of Asia is being assessed and calculated in real time.
Oil prices have already surged as much as 13%, skyrocketing above $83 a barrel. Since Iran supplies about 5% of global oil, the price will rise by about 20% if its oil shipments are completely stopped, reckons Bloomberg Economics analyst Ziad Daoud. Losing the Strait of Hormuz as a major transit point for supply tankers could send prices to $108 per barrel, he estimates.
“Notably for risk assets, geopolitical tensions are unfolding at a time when the oil market has been in a state of narrowing backwardation since 2025,” says Carlos Casanova, an economist at Union Bancaire Privee.
“This indicates that supply has been outpacing demand, fostering expectations of lower future oil prices. A significant disruption in supply would be required to reverse this trend and trigger a substantial spike in oil prices, though such a scenario remains uncertain for now.”
China’s already unbalanced economy could take a hard hit. While Xi might welcome the end of deflation, a sudden surge in imported inflation hardly seems desirable.
A prolonged conflict in the Gulf would force Team Xi to replace the Iranian supply on the fly in ways that could have global implications. China is, after all, still the most important factory floor in global supply chains.
Europe and India are on edge, too. Though the US would take hits, the world’s largest economy can lean on its shale gas industry for a time.
China “would lose another source of cheap barrels,” says TD Securities analyst Rich Kelly. “Russia stands to benefit, with Indian and Chinese demand likely shifting toward heavily discounted Urals, which would ease some pressure on the Kremlin from decreased crude pricing.”
The timing of all this is rather awkward, coming roughly a month before Trump is set to visit Xi. If the last year of tariffs wasn’t bad enough, Xi must figure out how to play the summit.
Letting Trump slide on complicating China’s partnerships with Venezuela and Iran might leave Xi appearing weak in CCP circles. Xi’s recent military purges, after all, were aimed at strengthening his hold not just over the People’s Liberation Army, but the CCP, too.
In geoeconomic terms, it is a difficult balancing act. The US-China truce of recent months helped tame global market volatility. Renewed rancor between the globe’s two biggest economies wouldn’t be in Asia’s interest.
The same goes for the economic fallout of a prolonged conflict in the Middle East. “Asia is particularly exposed as it buys the lion’s share of oil and gas produced in the region,” says Stefan Angrick, economist at Moody’s Analytics.
Angrick notes that roughly a third of global seaborne crude oil exports pass through the Strait of Hormuz, with most of the volumes destined for large Asian economies such as China, India, Japan and South Korea. This “conflict injects fresh uncertainty into the trade outlook,” Angrick notes.
Although China is a major buyer of Iran’s discounted crude oil, it maintains sizeable reserves that could cushion short-term supply disruptions. But, Angrick notes, this renewed tension complicates matters for India, which imports large amounts of Middle Eastern oil and has agreed to wind down purchases of Russian oil as part of a US trade deal now in limbo after the US Supreme Court struck down Trump’s country-based tariffs.
Angrick notes that “Asia’s high-income economies, which heavily rely on commodity imports, are particularly vulnerable to the direct economic fallout from the conflict.” By Moody’s estimates, Hong Kong, Japan, Korea, Singapore, and Taiwan import more than 80% of the energy they consume.
Events in the Middle East add to the reasons the Bank of Japan is unlikely to hike rates anytime soon.
“We had already viewed the likelihood of an interest rate hike in March or April as low, but amid rising uncertainty stemming from developments of the situation in the Middle East, the BOJ is likely to adopt a more cautious stance, further reducing the probability of a near-term rate hike,” says Takeshi Yamaguchi, chief Japan economist at Morgan Stanley MUFG.
“If tensions in the Middle East are prolonged, there is also a growing possibility that the June rate hike, which we currently assume as our base case, could be postponed further,” Yamaguchi said.
Food costs are another area of vulnerability. A surge in commodity prices will fuel inflation and complicate life for central banks around the region.
Emerging Asian economies struggling with external debt repayments are also on the front lines. On top of fallout from the Ukraine war, a combined surge in energy and food costs could augur ill for economies from Bangladesh to Pakistan to Sri Lanka.
Much depends on how long the standoff lasts and how intense the fighting becomes. “Whether the Strait is closed by force or rendered inaccessible by risk avoidance, the impact on flows is largely the same,” says Jorge Leon, head of geopolitical analysis at Rystad Energy. “Unless de-escalation signals emerge swiftly, we expect a significant upward repricing of oil at the start of the week.”
Could things get worse than markets expect? “History argues strongly in favor of selling geopolitical risk premium when hostilities start,” Barclays analysts write in a report. “What worries us is that investors have now learned this pattern and might be underpricing a scenario where containment fails.”
The risk of surging energy prices validates Xi’s policy of supporting the yuan, whose recent stability produced the longest winning streak since 2010.
“A weak yuan has real costs for China’s consumers and the broader economy,” notes economist Brad Setser at the Council on Foreign Relations. It’s “significant,” he adds, that there’s an “internal debate” about the pros and cons of the yuan policy.
Liu Shijin, a former member of the People’s Bank of China’s monetary policy committee, says a “reasonable” appreciation in the yuan exchange rate would increase purchasing power and boost consumption, while making the currency more attractive globally.
Looking ahead, economist Stephen Jen, CEO of Eurizon SLJ Capital, thinks the yuan could rise to 6.25 per dollar by year-end, roughly 10% higher than current levels.
After watching Japan’s multi-year obsession with a weaker yen, Jen notes, Beijing seems to have decided that an undervalued yuan leads to a “vicious circle” it should avoid.
Yet the yuan exchange rate could become its own balancing act if war in the Middle East slams global demand in ways that make it hard to keep Chinese economic growth near 5%. Suffice to say, the drama surrounding this week’s “Two Sessions” meetings in Beijing is intensifying as US bombs fall on Tehran.
Follow William Pesek on X at @WilliamPesek
