War in Iran could rewire China’s global role

The military confrontation between the US, Israel and Iran has entered its third week, yet it has not unfolded as a quick and decisive campaign. Instead, the conflict is gradually turning into a war of attrition, with the risk of evolving into a prolonged standoff. The Iranian regime has not collapsed; on the contrary, it has exerted pressure on Washington by selectively disrupting shipping through the Strait of Hormuz.

As a result, the significance of this conflict goes far beyond regional security. It is rapidly spilling over into a systemic shock that could reshape global energy pricing, trade cost structures and even financial expectations. For China, the key question is not whether it will be affected, but how this shock may translate into deeper structural changes.

In the short term, China has proven more resilient than many had expected. As the world’s largest crude oil importer, China does rely heavily on external energy sources, and a significant portion of its seaborne oil imports passes through the Strait of Hormuz. However, the strategic preparations made over the past two decades are now playing a critical role.

China has largely established alternative overland energy routes, while its sources of energy imports have become increasingly diversified. This has significantly reduced dependence on any single region. More importantly, China has built up substantial strategic energy reserves, sufficient to cover several months of net imports. This provides valuable time for policy adjustment and market adaptation.

At the same time, China’s energy structure is undergoing gradual transformation. The rapid adoption of electric vehicles, along with the expansion of solar, wind and energy storage systems, is steadily reducing the economy’s dependence on oil at the margin. The current turmoil in the Middle East will, in all likelihood, further accelerate this structural energy transition.

Therefore, in the short term, China is not facing a problem of energy availability, but rather one of energy price volatility. It is at this point that the real impact of the Iran conflict begins to emerge.

If instability in the Strait of Hormuz shifts from a temporary event to a sustained expectation, rising oil prices will no longer simply reflect supply and demand, but increasingly embody a risk premium. Once oil prices move into a higher range, their effects will quickly spread through inflation expectations, interest rate policies and the repricing of global financial assets — including China’s economy.

For China, this shock has a dual nature. On the one hand, higher energy prices will raise manufacturing costs and, together with increased shipping and insurance expenses, further squeeze export margins. Given China’s continued reliance on external demand, any slowdown in global growth caused by high inflation will inevitably weaken export momentum.

On the other hand, the impact is not entirely negative. One important macroeconomic feature of China in recent years has been relatively low inflation, with even signs of deflationary pressure. Under such conditions, moderate imported inflation may actually exert a degree of disciplinary pressure while also producing a corrective effect on the economy. It can help lift industrial prices, improve corporate profitability and stabilise expectations. In this sense, the real risk for China is not rising inflation per se, but uncontrolled inflation. As long as oil prices remain high but manageable, the effects may combine both pressure and adjustment.

Looking beyond short-term fluctuations, the deeper significance of this conflict lies in structural changes.

First, it may lead to a reallocation of global manufacturing. In a high-energy-cost environment, the impact on different economies is uneven. Economies that are highly dependent on energy imports and have fragmented industrial chains will see their competitiveness eroded quickly. By contrast, China, with its complete industrial system, economies of scale, and ability to absorb and pass on costs, may find its position in global supply chains strengthened.

In an inflationary environment, global buyers tend to favour products with better value for money, which amplifies the advantages of Chinese manufacturing. As a result, China’s export market share could expand further, and the relative strengths of its supply chains are more likely to come into full play.

Second, global capital flows may shift. The Middle East has long been a major source of global capital. If regional instability intensifies, capital will naturally seek safer destinations. Financial centres such as Singapore and Hong Kong are well positioned to absorb part of these flows. This is not only a matter of capital volume, but may also have longer-term implications for the regional financial landscape.

Third, there could be gradual changes in the international monetary system. If energy transportation becomes more closely linked to settlement currencies — for example, by offering preferential access to shipments settled in renminbi — this could create new practical space for the use of the Chinese currency in energy trade. 

At the same time, the Belt and Road Initiative will face new constraints and adjustments. Iran is a key node connecting Central Asia, West Asia and Europe. Continued instability will increase security risks and financing costs for projects in the region. This may push China to shift its focus from expansion in scale to greater emphasis on security and sustainability, while accelerating the development of alternative routes.

At a deeper level, the conflict is also reshaping the strategic interaction between China and the US. Energy is increasingly becoming a key variable in their competition. On one side, the USmay attempt to strengthen its leverage over China by influencing energy routes and supply systems. On the other, China is reducing such external constraints through diversification and energy transition.

Yet this competition is not one-sided. If the US becomes deeply entangled in the conflict, its capacity to allocate resources and its international credibility may be weakened, potentially giving China greater strategic room for manoeuvre.

In such an uncertain environment, China’s choice to remain cautious and restrained is not passive. It reflects a strategic judgment: to avoid prematurely committing to a fixed position before the external shock fully unfolds, while preserving flexibility to adapt to emerging structural changes.

In this sense, the Iran conflict is not merely an energy shock for China. It represents a dividing line.

In the short term, it tests the resilience of China’s economy. In the long term, it accelerates a redistribution of global structures and may redefine China’s position within them.

If China can turn external shocks into momentum for internal adjustment — optimising its energy structure, industrial system and global engagement — then what appears to be an external uncertainty may, in fact, become a catalyst for transformation. From this perspective, the Iran conflict may not determine China’s future, but it is likely to accelerate an ongoing process — one that moves from energy shock toward structural reshaping.

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