CITIC Securities: Assessing the Impact of US-Iran Conflict on China's Economy

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Source: CITIC Securities Research

Written by Yang Fan, Max Gao, Wang Ximing

The intensity of the US-Iran conflict’s disruption exceeds market expectations, and no definitive solution has been seen yet. High oil prices may persist longer. We expect China’s exports to remain relatively strong; the US-Iran conflict presents both demand-side negative impacts and supply-side structural benefits. Rising traditional energy prices could boost demand for new energy products, and exports of the “Three New” categories are expected to become a key driver. However, in the short term, the temporary closure of the Strait of Hormuz may lead to reduced or halted production at some oil and chemical companies, and China’s exports to Persian Gulf countries may temporarily decline. Domestic production and export data may show significant slowdown starting in March. If geopolitical tensions worsen, policy actions could be seen as early as the April Politburo meeting. We expect that despite PPI turning positive in March, the People’s Bank of China will not tighten monetary policy but will continue to support expanding domestic demand. On the macroeconomic front, synchronized recovery of domestic and foreign demand in January-February 2026 has driven better-than-expected production. This week, market focus is on China’s January-February economic data and the Federal Reserve’s interest rate decision; next week, attention should be on Iran developments.

▍ The US-Iran conflict’s disruption exceeds market expectations, with no clear resolution in sight, and high oil prices may last longer.

At the outbreak of the conflict, markets generally viewed it as a short-term, localized friction lasting one to two weeks, based on past experience. However, as of March 21, 2026, the conflict has lasted three weeks, with significant gaps remaining between the sides on ceasefire conditions, and no effective path to de-escalation. The blockade of the Strait of Hormuz has already caused some Middle Eastern oil facilities to reduce or halt production. The International Energy Agency (IEA) forecasts a global oil supply drop of 8 million barrels per day in March, and high oil prices may persist longer. Historically, five out of nine US recessions occurred after sharp oil price increases, and markets are now pricing in the possibility of recession or stagflation.

▍ We remain optimistic about China’s exports. High oil prices pose both demand-side negatives and supply-side structural benefits. If oil prices stay high long-term, full-year growth could reach 7.8%.

On the demand side, IMF spokesperson notes that a 10% rise in oil prices typically causes a 0.1%-0.2% decline in global output. Based on current Brent crude futures prices, the implied oil price expectations suggest that high oil prices could negatively impact global trade by about 0.8%-1.5% this year. The impact of oil prices on the economy may be nonlinear; excessive increases could trigger a recession. On the supply side, rising traditional energy prices may boost demand for new energy products. China’s “Three New” exports could add an extra 1.5 percentage points to export growth. Since oil and natural gas account for a small share of China’s energy mix—coal and renewables are dominant—the rise in oil and gas prices has a larger impact on overseas energy prices. Some energy-intensive Chinese products, such as electrolytic aluminum, industrial silicon, steel, and coal chemicals, become more competitive globally. These supply-side benefits could offset demand-side declines, helping China’s exports remain relatively robust.

▍ In the short term, domestic production and export data may slow significantly in March. Policy actions are expected as early as April’s Politburo meeting, with monetary policy remaining moderately accommodative.

The blockade of the Strait of Hormuz may temporarily impact China’s exports to Persian Gulf countries, accounting for about 2.3% of total exports, possibly causing a decline in March-April export data, but a rebound is expected after the blockade is lifted. The disruption may also cause some Chinese oil and chemical companies to face raw material shortages, leading to reduced or halted production, negatively affecting industrial added value. Recently, operating rates for products like ethylene and ethylene glycol have declined. Currently, market expectations for counter-cyclical policies are low, but if high oil prices significantly impact the global economy, the Politburo may take measures to stabilize growth as early as April. Some market observers believe the Federal Reserve might tighten monetary policy due to high oil prices, but this is more about inflation expectations than oil prices alone. We believe China’s inflation environment is different; monetary policy will not tighten due to supply shocks. In 2021, China implemented easing measures despite high PPI caused by supply shocks. If high oil prices slow economic growth, the central bank is likely to cut interest rates to support the economy.

▍ Macroeconomic tracking: Synchronized demand recovery in January-February 2026 drives better-than-expected production.

Economic data for January-February show varying degrees of recovery on both supply and demand sides, exceeding market expectations. Industrial value-added growth surpassed expectations, driven mainly by demand rebounds in investment and exports, with service sector output slightly up, benefiting from the extended Spring Festival holiday. On the demand side, initial effects of policies to expand domestic demand are evident: fixed asset investment stabilized and rebounded, especially infrastructure investment, which saw high growth. Retail sales also outperformed expectations, boosted by early replacement of old appliances, holiday shopping, and extended holidays. Looking ahead, exports are expected to maintain high growth, while consumer spending will gradually recover supported by policies like appliance replacement. The issuance of special bonds and new financial tools are expected to help stabilize fixed asset investment growth. This week, market focus remains on China’s January-February economic data and the Fed’s rate decision; next week, attention should be on Iran developments.

▍ Risk factors:

Policy implementation delays, unexpected changes in economic performance, policy effects falling short, and geopolitical risks exceeding expectations.