Energy shock is starting to hit China’s economy

China’s economy risks an energy “shock” amid the fallout from the Iran war. Soaring oil prices threaten to swamp its export-fueled model and increase the cost-of-living pain for global consumers. Domestically, spending has dried up, with shoppers turning into “shadow savers.”

Inflation has become the buzzword. The global economy has been “thrown off track,” and the disruption will “almost certainly lead to a spike in inflation,” Eswar Prasad, of the Brookings Institution, warned, as reported by the Financial Times.

Against this backdrop, the world’s second-largest economy faces the “biggest price hike in years,” according to China Business Spotlight this week. “A raw material shock is driving industrial prices to multi-year highs,” it pointed out.

“This surge in costs stems from higher import prices for energy and raw materials, which are being passed on to Chinese industry. The tensions surrounding Iran and the strategically vital route through the Strait of Hormuz are acting as a catalyst,” China Business Spotlight said.

Drip, drip, drip effect:

• In March, exports rose 2.5% compared to the same period in 2025. But that was significantly lower than the previous two months after being hammered by the Iran war.
• Chinese customs agency data for January and February showed that exports jumped by a whopping 21.8%. Still, the numbers were distorted by the Chinese New Year holiday.

[The Gulf conflict] is driving up costs across China’s supply chains.

Trivium China

Delve deeper: “[The Gulf conflict] is driving up costs across China’s supply chains. Its inflationary impact is no longer confined to energy – it is becoming broad-based, spreading into the services sector,” Trivium China, the research and consultancy group, cautioned.

Between the lines: “The timing is particularly difficult for Beijing. Policymakers were already grappling with weak consumer demand and limited fiscal and monetary room to maneuver,” it said in a newsletter earlier this week.

Big picture: “A broad-based cost shock now threatens to squeeze corporate profits, household purchasing power, and government tax revenue all at the same time,” Trivium China added.

China Factor comment: The strain on Beijing’s export-powered growth model will only increase if the Iran standoff drags on and energy prices continue to surge. Inflation will spiral in markets critical to China, with spending drying up like drops of crude oil.