How China Is Winning the War With Iran

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0:47Stephanie Flanders:I'm Stephanie Flanders, Head of Government and Economics at Bloomberg, and this is Trumponomics, the podcast that looks at the economic world of Donald Trump, how he's shaping and shaking the global economy and what on earth is going to happen next. Well, it's the afternoon of Wednesday the 1st of April in the UK, and we're well into the fifth week of a conflict in Iran that very few of America's allies wanted or even now fully understand. They are, though, dealing with the economic consequences, biggest of which being energy prices and an Iranian stranglehold over the Strait of Hormuz. Last week, we looked at this crisis as an exercise in economic statecraft, one in which, against the odds, Iran seemed to be doing rather well.

1:35Stephanie Flanders:In this episode, we're looking east to consider the view of the crisis from Beijing. Like many, the Chinese government would almost certainly prefer the conflict hadn't started, brings instability to a region that's increasingly important, and inflicts high oil and gas prices on an economy that relies on significant energy imports in a context of a still fragile domestic recovery. And yet, and yet the fact that Donald Trump is once again demonstrating to the world his tendency to inflict wildly unpredictable and damaging swings in policy on his allies surely also provides something of a strategic opportunity for China.

2:16Stephanie Flanders:It's leaders liking to say these days that it's China that is the stable and predictable world power. Well, discussing this, we have first making her Trumponomics debut, Fran Wang. Fran is working in London for a few weeks, but in her normal life, she's a linchpin of our China economy and government team in Beijing, having covered China's economy for nearly 20 years. Fran, great to have you here. Thanks for having me. and from our Washington DC bureau Adam Farrar Adam is the senior geoeconomics analyst for Asia Pacific Bloomberg Economics and he previously served as the senior advisor to Vice President Kamala Harris on the Indo-Pacific space and intelligence he also has written a piece for us on how the war in Iran is changing the relationship between the US and China we had you on Adam last when we discussed the Trump administration's national security strategy document back in December of 2025.

3:12Stephanie Flanders:I feel like we've had several national security strategies since then, but welcome back to the show. Great to be here. It seems that things have certainly evolved since then. Evolved is one word for it, yes.

3:28Stephanie Flanders:We'll talk about the economy in sort of traditional Trumponomics fashion. We're going to be interweaving the economy and the geopolitics, and we will get to the economy in a minute. But Adam, you have written a piece for us overnight, the conclusion of which I thought set the stage rather well. You say the risks to Beijing from a prolonged Middle East war are real, and a near-term off-ramp remains far from certain. For now, though, China has the opportunity to leverage the situation to its benefit. So just give us a sense of how you reached that conclusion, and then we'll do some unpacking. Of course.

4:04So I think you set it up well in the intro, there's no doubt that Beijing does not look kindly on the instability growing in the region right now. While they certainly have, I'm sure, some happiness in seeing the United States strategically dragged into another war in the Middle East that distracts them potentially from the Indo-Pacific, as we'll talk a little bit about more, they're also just very worried about the long-term potential for the Gulf to remain unstable, for oil supplies to be infrequent and to put stress on the economy at a time when things are positive on the export side, but still struggling domestically with consumption, not reaching the levels that they need to maintain the demand necessary for the amount of production they're doing internally.

4:51But at the same time, there's no doubt that there are real opportunities for Beijing in this moment. And we can kind of look at that through three different lenses. The first is diplomatic. China has spent a significant amount of effort and breath pushing a narrative since Trump came to office that it is the United States, not China, that is bringing instability to the world. And that China is the real protector of the rules-based international order and even the United Nations. And, you know, turning the narrative that was so persistent under past administrations, particularly the Biden administration, on its head.

5:29And while certainly I think most of the world has the perspective to realize that there is a lot of hypocrisy potentially in those arguments from Beijing, the reality is that the actions the United States has taken since President Trump came to office, starting obviously with the Liberation Day tariffs moving towards the eventual bombing of Iran alongside Israel in June. then, of course, the midnight raid to seize Nicolas Maduro from Venezuela and now this ongoing four-plus week war in Iran, there is certainly appetite to accept this narrative in a way that there wasn't before, particularly among countries that are feeling the real pain of this instability and uncertainty.

6:11At the same time, you know, diplomatically, China historically does not take particular interest in engaging in negotiations or trying to lead, you know, piecework around the world. But here, there's this rare opening for them to potentially drastically increase their role in the Middle East and their relations with key partners. And that comes from a couple main drivers. The first being that they're one of the unique countries on this planet that have positive relations with Tehran and the Gulf, you know, built around a massive economic relationship with Iran as their primary economic conduit and partner, which is even dwarfed by the relations with the Gulf that obviously relies heavily on Gulf oil exports, but also a lot of economic trade.

6:55And as a result, given the fact that the United States is now considering ending the war without addressing the flow of oil through the Strait of Hormuz and Iran's control of that, there is this potential for Iran to emerge as a intermediary negotiator to try and reopen the strait. And that's not only because of those ties, but also the simple reality that they are the largest purchaser of the oil coming through the strait itself. Obviously, there's a lot left to determine there, and China may not take that opportunity, but they certainly could. More traditionally, though, there is a simple numbers problem here for the United States.

7:29The U.S. has expended a huge amount of its most advanced munitions in this conflict and continues to on a day-to-day basis. And the reality is that those long-range missiles like Tomahawk cruise missiles and those defensive missiles like Patriot interceptors are essential for any sort of Indo-Pacific contingency, whether that be the United States trying to protect Taiwan or act in protection of the Philippines in the South China Sea contingency. And all of that leaves China in the midterm in a much better position, potentially militarily. The other part of that, too, is that we've seen a degradation in U.S.

8:06assets through this conflict. We saw the loss of a command and control aircraft called an AWACS over the weekend, a strike that demonstrated some support that Iran may be getting from countries like Russia. But nonetheless, the United States has few of these capabilities left in the world. And while it is certainly working to reconstitute them, those are years away. And, you know, as this war is prolonged, we may see additional losses that further undermine its strategic position and its ability to enact potentially its military plans in the Pacific. The last part of this I think we shouldn't forget is simply watching and learning from what the United States is doing.

8:45I think it's probably not lost on most people that this is the largest military operation the United States has undertaken, arguably since the 2003 invasion of Iraq. And a lot has changed since 2003 in terms of the way of war and the way the United States plans to fight a war. And so here, China is both, I'm sure, concerned by the effectiveness of U.S. capabilities, but also learning from what they've seen so far. And taking the opportunity to see how the U.S. is integrating drones, new missile systems, and its air power and naval power in a modern conventional fight. And I want to be clear, obviously, a fight in the Indo-Pacific, particularly over Taiwan, would have a very different character.

9:23But the tools would be the same. And there's much to be taken from this. And those who follow this know China actually built its modern military very much off of the lessons of the U.S. invasion of Iraq in the early 90s in Desert Storm. And so here's another opportunity for them to learn and grow and be more effective in any sort of contingency. Not to belabor this too much is simply economic. is the reality that China has positioned itself through its massive growth in green energy, its own domestic energy industry, and its reserves of oil that it has brought in over the last several years to be able to weather this storm.

10:02And not only weather this short-term storm, but potentially serve as a gas station for other parts of Asia. And we're starting to see that already with these small but important deliveries of key fuel stocks to the Philippines and Vietnam and potentially more to come, building on goodwill, highlighting the unique role China can play as a stabilizing influence in the region, and demonstrating that China is a country that can be prepared and can prosper through these types of crises, the repercussions from this war are extreme. There is no doubt that countries are going to have to rethink their energy security.

10:37And there, China also stands to gain. China has become by far the largest producer of green and renewable energy technology in the world. And obviously the most capable, it seems, and commercially viable source of electric vehicles, both of which are going to be in high demand as countries, particularly in Southeast Asia and Africa, seek to insulate themselves from further crises.

11:00Stephanie Flanders:Well, that's a fantastic survey. Thanks, Adam. And actually, and you've also taken us a little bit onto the economy. We're going to touch on a few things and sort of go deeper into the economy, but a few things that Adam mentioned there. It's worth remembering, since we haven't talked about the Chinese economy for a while on this show, the basic state of China's growth coming into this year, coming into this crisis. I mean, it's recovering, but still quite subject to deflation and excess supply, still very dependent on exports. What's the basic state of the economy? Yeah, the economy has been recovering since it reopened from COVID-19 four years ago now or three to four years ago now.

11:46However, the recovery has always been like two speed with production staying very strong, but consumption struggling to pick up. And the key reason why production has been strong is because of exports. and exports contributed to nearly a third of GDP growth last year, which was the highest since 1997. So exports have been a key support for China's growth, especially if you think about how long deflation has been plaguing the economy for years and also domestic consumption has been so weak. Retail sales growth was still quite tepid, despite government-subsidized Cash for Clunkers program for like two years.

12:35So really, domestically, China's economy is still suffering from overcapacity, as you mentioned, and also years-long housing slump, which really bettered consumer and business confidence.

12:47Stephanie Flanders:Most countries, this is really an unwelcome shock. And I'm thinking, you know, I'm obviously sitting in the UK, but we're constantly doing the numbers of what it is going to mean for growth, for inflation to have this significant rise in energy prices. I mean, China's not immune to that, right? Yeah. I mean, China has been suffering from deflation, so price rises should be welcome. However, it depends on how broad the price rise will be. Judging from the current situation, you could see that most likely beneficiary would be upper stream industries. oil, minerals, resources companies. Downstream companies will find it extremely hard to pass the costs on to consumers because competition is still so fierce in the country.

13:38And if you think about how deeply rooted the excess capacity problem is, the government has been launching the so-called anti-involution campaign for many, many months now. The effect, however, is still quite limited. Unlike 10 years ago, when a similar campaign was launched, this time around, companies suffering from overcapacity are in privately owned industries and sectors the government may want to support, like renewable energy. So that makes it harder for the government to take a strong-handed administrative approach to addressing this issue this time around.

14:18Stephanie Flanders:Such an ugly word. But anyway, the involution, we should remind people what that means. I mean, the basic sense is that some of the reason that they've done so well in all these new technologies and other things in these industries is that they've got lots of companies competing, but that produces excess investment, excess supply. Is that the basic? Yeah, and lead to workers working extremely long hours without properly compensated. Which you could also say was a core part of the Chinese economic model. Just one last one for now for you, Fran. Again, just to remind us, because it's confusing when we talk about how they've built up their energy sufficiency, but they also have been getting a lot of oil out of Iran.

15:00Stephanie Flanders:What is their capacity to withstand reduced supplies of oil and gas from the rest of the world? Yeah, as Adam mentioned, China has been building oil reserves over the past few years. Some analysts put China's oil reserves as sufficient for meeting more than 80 days of refining needs. So I'd say there is no short-term, immediate shortage, oil shortage concern. However, for longer term, even though China has been pushing for more renewable energy for more than a decade now, renewable energy still accounts for just about 20 % of its total energy consumption. More than 50 % of its energy consumption is met by coal, which China fortunately has abundant reserves of.

15:51However, if we want to reach President Xi's carbon neutral goals, and also if we don't want to repeat the serious air pollution problems we saw about a decade ago, there's no way that China can switch back to coal in a massive way. So there's always a trade-off you have to balance. And I think the war in Iran will just strengthen China's determination to expand further into renewable energy.

16:23Stephanie Flanders:So there's a lot of noise about AI, but time's too tight for more promises. So let's talk about results. At IBM, we work with our employees to integrate technology right into the systems they need. Now, a global workforce of 300 ,000 can use AI to fill their HR questions, resolving 94 % of common questions. Not noise, proof of how we can help companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business, IBM.

17:02Stephanie Flanders:I guess on the one hand, China's trying to show off it kind of got its strategy. It was ahead of the curve on preparing itself for these things. But it also wants to, where it makes sense, use some of its excess capacity or some of its strength in these sectors to make friends and influence people. So where are we seeing that? I think the reality is that a lot of this was already underway, right? The push, particularly in parts of Southeast Asia and even in Europe, to push heavily into renewables and the reality being that to do that in most industries, particularly solar and wind, you're really talking about Chinese technology.

17:41Certainly, there are some European companies putting out wind turbines as well. But for Southeast Asia, this is a China question. And what we're seeing here now is less a new movement towards renewables, but rather an effort to revitalize and potentially speed up that transition. Now, you know, it's still very early going here, right? We're as much as this war seems to have gone on forever. It's only been four weeks. And if the crisis ebbs or starts to really stop here in the near term and the strait reopens, we may not see the same push with the same urgency that people are talking about it now.

18:15But I think that right now, that's where we would expect to see further growth. We've already seen big inroads from companies like BYD and other electric vehicle companies throughout Southeast Asia and now increasingly Europe and efforts to push into other regions and particularly the Middle East. So I think all of that, you know, the Chinese stand to benefit, even if there's marginal change in the near term.

18:39Stephanie Flanders:This is an opportunity for China to sell its net zero technology and products to other goods, but also short term, it can sell some fossil fuels to countries that have caught short. So what's happening there? What we've seen so far is very much an evolution, you know, since the start of the war, as the air and the pipeline of oil to Asia kind of moves its way through and starts to hit Asian markets. That's been created by the shutdown of the Strait of Hormuz. And for some countries like China, Japan, Korea, Australia, they've got reserves, they have options, they have budget flexibility. But for others, particularly in Southeast Asia who have much tighter fiscal realities, we're already starting to see this crisis turn into a shortage situation with key products.

19:33And, you know, we saw a declaration of an energy emergency in the Philippines. We've seen countries including Vietnam, Indonesia, and the Philippines discuss cutting flights between certain countries because of a lack of jet fuel availability, because of limited storage in those countries. And so far, the limited reporting we have on what China, the actions China has taken is to try and address those immediate concerns in some of these countries. And that's been with the delivery of jet fuel and diesel and trying to provide a little bit of its refining capability to meet its neighbors' partners' needs.

20:09To keep in mind, this is also happening on top of the fact that China put in place an export ban on refined products almost immediately following the closure of the Strait of Hormuz, which highlights how they are very clearly strategically thinking about how to deploy these refined products, less for profit but more for diplomatic gain.

20:27Stephanie Flanders:I'm struck because in other contexts, we talk about there being really quite difficult relations with the Philippines out in the ocean when they're increasingly fractious territorial disputes. Is there any sense that that could come into any of these conversations? I certainly can't speak to how Beijing is viewing this current moment, but the actions do speak clearly to the idea that they are both being flexible and creative in how they're utilizing these resources and seeing opportunity and seeing a moment to potentially reframe the discussion, even if marginally in the domestic populations and the political environments in these countries.

21:08You know, Vietnam is a very different situation in terms of its historic political relationship. But even there, it's obviously a stressed relationship over the South China Sea and broader competition between the two. And so the fact that they were willing to move quickly to deliver, just to be clear, a relatively small cargoes but would have a tangible impact, you know, does say something about them thinking creatively about how to use their leverage in this moment. with the idea that, you know, they may not be able to do this for very long depending on how long this conflict goes.

21:39Stephanie Flanders:I mean, Fran, it sort of feels like, I mean, all these potential levers, economic and diplomatic, that the Chinese can be thinking about deploying now. I mean, it speaks to this, the level of sort of redundancy that they've built into their economy. I guess President Xi Jinping calls it the fortress economy. You know, it feels almost a bit like, you know, when they sort of try and reassure you about jumbo jets and they say, there's a million things that go wrong and we have got another engine and we've got all these different things that we can resort to. It feels like China has all these additional spare engines sitting there and alternative planes and the rest of the world has left itself rather vulnerable despite having gone through the COVID experience.

22:22Stephanie Flanders:Is this ultimately sort of bad news for the rest of us though because it means that it's making the case for having all of this excess supply and redundancy in the Chinese economy, which if you're competing with Chinese products overseas, it's not much fun at all. Yeah, I think the price competitiveness will be there to stay. And also in terms of policymakers' thinking, President Xi himself and the Politburo have repeatedly stressed on the so-called bottom line thinking, which I think it's basically always think about what you can do in a scenario of crisis, even if your situation now is still quite safe.

23:05Our government sources, while speaking to us before, actually said frankly that one of the reasons that they are not in a rush to address overcapacity in sectors like renewable energy and other energy sectors is because of the possibility of a crisis like in a war. So, and that was quite early. It was like a couple of years ago.

23:30Stephanie Flanders:We should still remember, though, that you may have lots of spare sources of energy and back up this, back up that. One thing they haven't got as a backup engine is anything to replace foreign demand to fuel their economy. As you mentioned at the start, they're very dependent on foreign exports. If this continues, the risk of a global recession is not one that China is well prepared to withstand right now, right? Yeah, I think that would be a true concern for Beijing if foreign demand collapses. Because domestic demand, I think in the past, it was driven by two key sectors, infrastructure and property.

24:10But infrastructure investment has been very inefficient now because of the saturation issue and because of the slowing pace of urbanization. and in terms of property, the government seems to be quite reluctant to repeat the aggressive stimulus it applied to rescue the sector back in probably 2015. I think one of the reasons is because they hope to replace property as a growth engine with more innovative tech sector growth. So that makes it quite hard for the Chinese government to really find another immediate replacement for foreign demand.