Is China a winner of the Iran war or facing economic risks? — Counting the Cost

[0:13] Hey there, I'm Scott McClain. This is Counting the Costs on Al Jazeera. [0:16] Your look at the world of business and economics. [0:19] War winner or hidden risks? [0:21] China's economy grew faster than expected at the start of the year, despite the Iran conflict. [0:26] But is Beijing really holding firm? And how long can it last? [0:30] Strong exports, but weak domestic consumption. [0:33] China is positioning itself as a stable global economic player. [0:37] But is it? Or are there cracks beneath the surface? [0:40] Well, a war it didn't fight, and a recovery it didn't expect. [0:49] China's economy is off to a strong start this year, [0:52] even as the conflict between the U.S., Israel, and Iran disrupts global energy markets. [0:57] It grew by 5 percent in the first quarter, beating expectations. [1:00] But beneath the headline numbers, the situation is more complicated. [1:05] Weak domestic consumption, a struggling property sector, [1:08] and a shrinking population are still weighing on the economy. [1:12] Beijing, though, is doubling down, investing heavily in high-tech industries [1:16] and green energy, where it already dominates global supply chains. [1:20] And as the Iran war reshapes energy flows, China may be more insulated than most. [1:25] But is Beijing really emerging as an unlikely winner of this war? [1:29] Or are deeper vulnerabilities maybe being overlooked? [1:33] Fenton Monaghan reports. [1:34] Five percent. [1:37] That's how much the Chinese economy grew in the first three months of the year. [1:41] It's a number that's stronger than expected, [1:43] especially since that period includes the disruptions of the first month of the Iran war. [1:48] We have had a good start to the year, which is truly rare and commendable. [1:52] This fully reflects the resilience of the Chinese economy. [1:56] Exports have been a major driver of growth, surging 15 percent, [2:00] although this momentum slowed significantly after the Iran war broke out. [2:04] Industrial output has also been strong, up 5.7 percent in March compared to the previous year. [2:10] China has also benefited from its large energy reserves. [2:14] It has enough to last several months, insulating the economy in the short term. [2:19] China is also a leader in renewable energy. [2:21] It controls more than 70 percent of global manufacturing capacity. [2:25] And as fears about energy security grow, [2:28] China could be well-placed to expand into new markets. [2:32] But while it's weathering the storm for now, [2:34] the Chinese economy still has vulnerabilities. [2:37] A prolonged energy shock could hurt demand in Europe and Asia, [2:40] which would be a blow to exports. [2:43] Rising oil and gas prices have meant higher costs for manufacturers. [2:47] China has struggled to encourage stronger demand from domestic consumers, [2:51] meaning many industries are facing tighter margins, [2:54] and difficult decisions in the coming months. [2:56] One week after the war started, prices started going up, [3:02] and they've continued to climb until now. [3:05] We will adjust the prices after product stocks run out. [3:09] The prices are expected to rise by 10 percent. [3:13] In this moment of global uncertainty, [3:15] President Xi Jinping is positioning himself as the voice of economic responsibility. [3:20] China has engaged in a flurry of diplomatic activity since the Iran war began. [3:24] And in every meeting, the message is clear. [3:29] We should strengthen communication, consolidate mutual trust, [3:33] cooperate closely, oppose the world's retrogression to the laws of the jungle, [3:38] and jointly safeguard genuine multilateralism and global peace and development. [3:43] China is not immune to the shockwaves of the Iran war. [3:46] But while some economic pain may be unavoidable, [3:50] there may also be opportunities to turn the crisis to its advantage. [3:53] Well, China is also struggling to deal with long-term economic challenges. [4:02] China's real estate sector crashed in 2020. [4:04] Trillions of dollars in household wealth was wiped out. [4:08] And major firms went bust, carrying billions of dollars of debt. [4:11] Property prices still haven't stabilized, [4:13] and consumer demand for houses hasn't recovered. [4:16] At the same time, local governments are struggling with their own debt crisis. [4:20] They've accumulated trillions in liabilities, [4:23] and as the economy slows, some are struggling to pay it back now. [4:27] China has also been suffering from persistent deflationary pressures. [4:32] Domestic demand from consumers is low and supply is high. [4:36] That obviously means prices are falling. [4:38] That causes businesses to struggle and salaries to decrease, [4:41] making the problem even worse. [4:45] All right, to discuss this further, we're joined by our panel. [4:47] Joining us from Shanghai, Sean Ryan, founder of the China Research Group in Taipei. [4:52] We have Anne Stevenson-Yang, research director at J Capital Research. [4:57] And in Beijing, Yostin Hauga. [4:59] He is an assistant professor in development studies at the University of Cambridge. [5:03] Thank you all for being on the program today. [5:05] Sean, I'll start with you. [5:06] I wonder if we can just take the broader 30,000-foot view here for a minute. [5:10] Obviously, with this war in Iran, the Middle East is struggling. [5:15] You have the United States, some may say, is looking increasingly erratic. [5:18] And there's China over there standing off to the side, [5:21] encouraging world peace while selling their goods to the rest of the world. [5:24] Is China the real winner in this war? [5:28] Well, it's great to be here, Scott. [5:29] China is the real winner from this war politically. [5:32] You've seen that they've positioned themselves as the stable, mature, responsible superpower. [5:37] And just in the last week, you've seen the heads of Abu Dhabi, Spain, Vietnam all visit Beijing [5:43] because you're seeing that the whole world is shifting their trade [5:47] and more of their political allegiance to China [5:49] because they just can't trust what the United States under Trump is going to do. [5:53] One day, Trump is attacking the Pope. [5:55] The next day, he's attacking Keir Starmer in the UK. [5:58] The next day, he's attacking his own biggest supporters like Tucker Carlson and Margaret Taylor Greene. [6:03] So I think countries are starting to realize China is the place to be [6:07] when you want to try to grow the economy. [6:10] And it's done well. [6:11] In the first quarter of the year, in January and February, exports went up 20%. [6:15] Retail sales went up 2.4%, beating expectations. [6:19] But here's the problem, Scott. [6:21] In March, you started to see the economy slow a little bit. [6:24] Exports only went up 2.5% in March. [6:27] Retail sales only went up 1.7%. [6:29] So even though China politically is a real winner of the last five weeks, [6:34] you're starting to see that high oil prices tension is starting to impact Chinese consumer confidence [6:40] and starting to impact manufacturing, which is a problem because China manufactures 30% of the world's goods. [6:47] So if this war doesn't end soon, China is going to become an inflationary pressure on the global economy, Scott. [6:53] And do you agree? [6:55] Well, I guess I'd modify it a little. [6:57] I mean, look, the U.S. presents a very low bar for political maturity and political dominance. [7:04] These days, maybe. [7:05] You have to ask, like, okay, if China is acting more stable and mature, what does it do with that? [7:12] And I think really what China is doing is keeping its head as low as possible. [7:16] As for negotiating with Pakistan, yeah, sure, China is close to Pakistan. [7:23] China has been, you know, really likes playing the go-between with countries that are considered problematic. [7:29] It would like best, you know, China is a very, very conservative political culture. [7:34] It would like best to stay out of this. [7:36] What Sean says about domestic political, I mean, economic problems, clearly these are problems that are only going to be exacerbated by this war. [7:48] Yosin, Sean and Anne have highlighted some of the challenges that China is facing, but the economy was up 5% in the first quarter of this year compared to last year. [7:58] And I wonder, is that an outlier? [8:01] Is maybe there a lag in the effects that this war may eventually have on the Chinese economy? [8:07] Well, China's economy has been relatively strong for a long time. [8:10] The problems that you highlighted are real problems. [8:13] These are also problems that have actually been in place before the Iran war. [8:17] So it's important to understand that these are longer-term issues independent of the war. [8:23] I think it's important when we talk about China's economy that we understand what determines the strength of an economy. [8:30] The strength of an economy is determined by technological resilience, by productive capabilities. [8:37] Embedded in people's tacit knowledge. [8:39] And this is something that China has built up over many, many years. [8:43] And we're seeing this on display now that China is actually quite resilient to this war because they built up strong manufacturing exports, and especially in clean energy, which is now in higher demand. [8:55] They built up a lot of economic complexity. [8:57] So while there are problems in China's economy with respect to the property sector, with respect to consumption, I predict that we'll see China's economy being quite strong and also continue to surging, albeit not at the same level, for many, many more years simply because they're so technologically strong and innovative. [9:16] Okay, big component of any economy is obviously its source of energy. [9:21] And I just want to bring up a graphic here that shows where China is getting its energy from and just how reliant it is on the Strait of Hormuz. [9:31] So it not only buys Iranian oil at a discount, it also buys oil from other Gulf producers. [9:36] So more than 40 percent of oil imports to China come through the Strait of Hormuz, almost a quarter of liquefied natural gas imports. [9:44] And I just wonder, Sean, how does a country that imports so much of its oil from the Strait of Hormuz escape this unscathed? [9:51] Well, that's a great question, Scott. [9:52] And I think China probably is better positioned to handle oil tensions than any other country in the world. [9:58] And this is why. [9:59] So 20 percent of their energy needs comes from wind and solar power. [10:04] So they generate 2.5 terawatts of solar and wind because they've invested hundreds of billions of dollars in renewable energy in the last 10, 15 years. [10:14] So that's one part. [10:15] So overall, 84 percent of China's energy needs comes from China. [10:20] China's also sitting on 28 billion barrels of oil in the dodging oil fields. [10:25] And we're not even including the South China Sea. [10:27] So what you've seen now is even Bongbong Marcos, the president of the Philippines, who's a China hawk, has said he's willing to discuss with China about exploring oil in the South China Sea for the first time since he's become president. [10:41] So China is better positioned than other nations to handle the oil crisis. [10:45] I was just in Thailand two weeks ago, and it's hard to find taxis at night because gas stations are closed. [10:53] You're starting to see that a lot of countries in Europe are doing work-from-home programs because they're running out of energy. [10:59] And the key, Scott, one last point, is that over 52 percent of new auto sales in 2025 in China were NEVs, so mostly battery-powered electric vehicles. [11:09] So you're not seeing consumers say, oh, my gosh, gas prices have gone up 20, 30 percent at the pump like they have in the United States and Europe because most people are just charging it in with solar, with wind, and with coal. [11:24] Okay, so China is very well positioned in terms of green energy, alternate sources of energy. [11:29] But also they have this stockpile. [11:32] And I want to bring up another graph that shows it. [11:34] So one of these bars shows the total imports of annual imports, the oil imports that China brings in. [11:43] And then the bottom bar there is the stockpile of oil that China has. [11:46] It's more than six months' supply, well over a six-month supply. [11:50] So, Anne, I wonder, isn't this the kind of crisis that maybe Beijing's strategy or their economy was built for? [11:57] Well, you know, the stockpile clearly is a much bigger advantage than is held in, say, Taiwan or Philippines. [12:07] But one has to take that number with a grain of salt. [12:10] You look at the U.S., for example, which is a net exporter of oil. [12:15] And really, the price of oil does not particularly affect, does not strongly affect the U.S. as much as it does other places. [12:25] Because you export at one price and then you import at another price, it kind of balances out. [12:30] But China's, I would say, Daxing is a pretty weak field. [12:34] China's oil situation is not like that. [12:37] They're very dependent on imports. [12:39] And so it's a tough situation. [12:44] It doesn't mean that China's economy is going to crash, but it does mean that it's in an exposed position. [12:50] Sean, you're shaking your head. [12:52] Yeah, well, I mean, Venezuela accounted only for 2% of China's oil needs and Iran only about 15%. [13:00] So I think Anne, as she historically does, underestimates the resilience and strength of China's economy. [13:06] You know, China has been de-risking from the rest of the world over the last 10, 15 years [13:11] because they felt contained by the Americans under Biden and Trump and with the Western imperial powers. [13:17] So China has six months of oil. [13:20] It's good quality oil. [13:21] And it hasn't been importing as much oil as other nations like Japan or most of Europe. [13:27] So they're much better set off than I think Anne needs. [13:29] But she's always underestimated China's strength since 2014 when she left China. [13:35] Anne, go ahead. [13:39] What's to say about that? [13:40] You know, so we disagree on that. [13:42] You know, China is a big economy and it sort of devolves slowly, but it doesn't mean that it's not weakening. [13:52] Fair enough. [13:52] Okay, Yostin, look, let's talk about some of the risks here. [13:56] China, as I mentioned earlier in the show, is dealing with this real estate bubble or the crash of their real estate bubble. [14:03] They're dealing with debt that these local governments have accumulated. [14:06] They have deflation problems. [14:07] They still have U.S. tariffs to contend with. [14:09] And obviously they are very reliant on the rest of the world to buy what they're selling. [14:14] They are very reliant on exports rather than domestic consumption. [14:17] I wonder if you would concede that there is a lot of vulnerability under the surface. [14:21] Well, I think, first of all, the problems that you highlight with the perspective of the domestic economy are the most important when we look at or when we highlight, when we point out some of China's economic issues. [14:34] But China has successfully diversified its export over the years quite tremendously. [14:40] Right now, roughly two-thirds of the world's countries have China as its main trading partner. [14:45] So China trades with basically all countries in the world. [14:49] So if one nation has less demand from China, that doesn't matter as much as it did a few years ago. [14:56] The U.S. used to be a very important trading partner. [15:01] It's still a very important trading partner for China, an important source of China's exports. [15:06] But it's reduced its reliance on the U.S. [15:08] And China has also shown now, especially through these trade battles or trade wars, if you want to call them that, with the U.S., that they have a lot of tools in their toolkit. [15:19] And countries know that. [15:21] And I think Trump will also see that it's in the U.S. interest to have a good relationship with China. [15:28] And China certainly, and this is something that I think China has shown that they want all along, they want to have an amicable relationship with the United States. [15:37] And they actually want an amicable relationship with most countries in the world. [15:42] This is a position that I wish more people outside of China see about China. [15:47] They're quite willing to cooperate with almost all countries that want to cooperate with them. [15:52] But I wonder if there's something more fundamental here that we're contending with in the economy in that, look, yeah, China is the factory of the world. [15:59] But its people are not wealthy enough to actually boost its own economy from within and to really bolster domestic consumption the way that you have in the United States. [16:07] It seems that maybe there's an imbalance here. [16:10] And I just want to play a clip from you from the U.S. Treasury Secretary Scott Besson. [16:14] This is from about a year ago. [16:16] Perhaps some progress has been made. [16:17] But he basically envisions the ideal scenario with respect to the U.S. relationship with China and how maybe the U.S. should be producing more. [16:26] China should be consuming more. [16:28] This is what he said. [16:28] Listen. [16:29] The Chinese have this imbalanced economy with too much manufacturing and actually the Chinese consumers really get the short end of the stick. [16:40] So Chinese households, they're called in what's called the middle income trap that could we do something together to say, OK, you rebalance, you consume more, manufacture less. [16:58] We are going to consume less and manufacture more and we'll be military rivals. [17:05] There'll still be an economic rivalry, but we're going to level the playing field by a lot. [17:10] Sean, would that level the playing field, as the Treasury Secretary points out? [17:16] Well, I don't really think so. [17:17] I actually used to advise Scotty Besson. [17:19] He was my client when he was a hedge fund investor. [17:22] And he's always underestimated China from an ideological standpoint. [17:26] He always said that because China's communist, it's going to collapse and you can't trust the numbers. [17:31] So the reasons why the Chinese consumer aren't spending is because they're worried about the big environment. [17:37] They're worried about U.S.-China relations. [17:39] And they feel that over the last 10 years, the United States has tried to contain and destabilize China the way it has with Venezuela, the way it's blockading Cuba, and the way it has Iran right now. [17:52] So Chinese households are sitting on 20 trillion U.S. dollars of savings. [17:56] They have enough money. [17:58] They just don't feel comfortable to spend because of the geopolitics. [18:01] They're also quite concerned about income growth. [18:04] So young Chinese, there's about a 14 percent unemployment rate, and they haven't earned money or salary increases in the last six years. [18:13] So Chinese aren't willing to spend because of income, bad real estate, and because of Scotty Besson's moves to try to contain China's economic growth. [18:22] So if Scotty wants the Chinese consumer to spend more, they need to start to ease and come up to a non-military conflict, a non-military tension with China. [18:32] Anne, what do you think? [18:36] Yeah, look, who listens to anything that Scott Besson says? [18:39] It makes no sense. [18:41] But as for the Chinese consumer, yeah, I really disagree with Sean. [18:45] The idea that the consumer actually thinks about geopolitics, I think, is completely wrong. [18:51] The problem with the Chinese economy, as far as consumption is concerned, is the division of income. [18:58] So, you know, if you're a, you know, if you control the economy as the Communist Party does, then, of course, you want more production and less consumption because, you know, more money. [19:09] But less consumption is because households receive less of a portion of GDP, and that's what has to change. [19:18] Sean, your response. [19:19] I mean, doesn't Anne have a point that there's a fundamental issue here, that you can't have sort of a capitalist-modeled domestic situation when you don't really have a free market capitalist system? [19:30] You know, I think the big issue where I disagree with Anne is she thinks that the Chinese consumer doesn't think about geopolitics. [19:36] I'll give a basic example. [19:38] 35% of all mobile phones in China were made by Huawei in 2017. [19:44] Then after Trump put on economic coercion against Huawei and wouldn't allow Android, Google's operating system, to be used on Huawei, basically Huawei dropped from a 35% market share to a 4% market share. [19:57] So Chinese felt on a day-to-day basis that they couldn't use top-of-breed products because of American containment policies. [20:05] You've also seen FDI from the United States has plummeted 40% over the last six years because American companies aren't investing here because they don't feel comfortable. [20:16] And so you're seeing that the weak income and job employment is really due to these geopolitical constraints. [20:23] So I hope that Anne would come back to China, I think it would be safe for her to do so, and sort of interview the Chinese consumer and get an understanding of what's really happening on the ground in the minds of Chinese consumers. [20:34] Because geopolitics is top of mind. [20:37] But don't American companies have reason to be skeptical of Chinese company? [20:43] I don't think so. [20:43] I mean, if you look at it, China is going to account for 30% of economic growth in 2026, according to the IMF. [20:52] You know, it's still a $7 trillion retail consumer economy. [20:57] It's the largest, some people say the second largest retail sector in the world. [21:01] So you're seeing companies like Mercedes, Adidas, Zara from Europe coming and investing. [21:06] It's the Americans that are creating a fear-mongering, xenophobic attitude. [21:10] I think it's very clear that China is welcoming to U.S., but there are some concerns, unfortunately, because America has turned or is turning China into an enemy, unfortunately, [21:21] which I agree with the professor from Cambridge, is that the Chinese actually want good relations with the United States. [21:28] You've seen Foreign Minister Wang Yi say, we would like to have a reset of relations with the U.S. [21:34] Yosin, what do you think? [21:35] I think it's important to highlight here what the process of economic development looks like for countries that go through that very successfully. [21:46] And it first involves focusing on production, focusing on exports. [21:50] And if you're successful, you will actually have a long period and a period of strong manufacturing exports and somewhat suppressed consumption. [21:59] This is what happened in South Korea when they had the development drive. [22:02] This is what happened in Singapore, and this is now what's happening in China. [22:07] So from China's perspective, they're doing everything right. [22:11] They're doing what they need to do to develop its economy. [22:14] And listening to the Scott Besson clip, of course, he would say something like that because China is a threat. [22:20] So I think we need to reframe what's happening here. [22:23] It's not that China is exporting too much. [22:26] Actually, China represents something like 14 percent of global goods exports, but 17 percent of the world's population. [22:34] What's happening is that China is transforming a big country, transforming very fast and probably transforming faster than what some other countries are comfortable with. [22:43] So what Scott Besson has an issue with is not China exporting too much. [22:48] It is that China is becoming economically competitive and challenging U.S. hegemony. [22:53] But it's not going to say that out loud. [22:55] Now, lastly, I just want to highlight that the Chinese government has actually said that we want to raise consumption. [23:03] In the 15th five-year plan, the five-year plan is being rolled out now. [23:07] They actually say very explicitly, we want people to consume more. [23:11] We need more consumption. [23:12] We're seeing this through the figures of deflationary pressures. [23:15] So we're now seeing a change in how China's economy operates. [23:20] So on the matter of consumption, there's actually agreement between both the Chinese government and, for example, Scott Besson, that they want to consume more. [23:29] And they realize that they need to consume more for the health of their economy. [23:32] Just to bring this conversation back to the war in Iran, the Iranians have, at stages during this conflict, been charging ships through the Strait of Hormuz tolls. [23:42] And there are some reporting that some of those tolls have been paid in Chinese yuan. [23:46] And do you think that this is a concerted effort by China, and maybe by China and Iran, to maybe have weakened the U.S. dollar? [23:57] You know, some people refer to this de-dollarization. [24:00] Do you think that that's the aim here? [24:01] I mean, they sure would like that. [24:03] But, you know, Chinese oil, Iranian oil has been largely denominated in renminbi since the sanctions were reimposed by Trump in 2018. [24:14] I think that there isn't much chance of the renminbi overtaking the U.S. dollar as a currency of exchange. [24:23] But, sure, they'd like, you know, if the sanctions come off, then they'll start pricing in dollars. [24:30] So the point is, if you're only going to be able to sell to China, and Iran has been selling, you know, 80 to 90 percent of its oil to China, then you're going to denominate in renminbi. [24:42] We're running out of time, but I just want to ask about President Trump's trip to China next month. [24:48] And, obviously, there's going to be a moment where the cameras will be there. [24:51] The two leaders, Xi Jinping, Donald Trump, will be shaking hands. [24:54] And, Sean, I just wonder who on this global stage is going to look like the reliable partner? [25:00] Who is going to look like the adult in the room? [25:02] Well, I think it's very clear. [25:03] Xi Jinping, he's not charismatic. [25:05] He's no Mao Zedong in terms of charisma. [25:08] But he definitely portrays himself as a stable adult person. [25:12] While Trump, you know, I mean, one minute he's attacking his biggest supporters. [25:17] The next minute he's attacking someone else. [25:19] So it's very difficult for any country. [25:22] You know, if even Canada and Mark Carney can't rely on having close relations with the United States right now, how can anybody else trust America? [25:30] And it's a problem. [25:31] Even though I've been living in China for 29 years, I'm a red-blooded, patriotic American. [25:36] And what Trump is doing geopolitically is destroying America's standing and prestige. [25:42] And that's definitely going to benefit the Chinese. [25:44] Anne, do you agree? [25:46] I mean, you know, the big and interesting task going forward will be what does the international system look like? [25:53] And how should it be designed? [25:55] It would be really nice if China would put forth some ideas on that. [25:59] But I don't think China wants to. [26:00] I think that the U.S. is just basically tearing down what there already is. [26:05] So what happens in the future is really anybody's guess. [26:09] Jostine, I'll give you the last word. [26:11] When Trump and Xi meet next month, I wonder how the rest of the world is going to view that relationship [26:16] or view who looks like the more reliable economic partner. [26:22] I think we have very clear data on who is the more reliable economic partner. [26:27] There has been polls done on this by Politico, by Focal data. [26:32] That show very clearly that countries around the world, people, the public in countries around the world, [26:38] now want to align themselves more closely with China. [26:42] And, you know, this is simply you may have heard this term, do nothing, win. [26:48] And this is something that's come up during the Iran war, [26:50] that China and Xi have simply acted like a more mature partner, a more cooperative partner. [26:57] And I do think China has a vision for how they want the world to function broadly. [27:03] I think they made it very clear over and over again and also through actions that they want more multilateralism, [27:09] they want more peace, and they're willing to cooperate with most countries around the world. [27:16] All right. Sean Ryan and Stevenson Yang and Jostin Hauga, it's a lively debate. [27:21] I appreciate you all being here today. Thank you. [27:24] And that's it for our show. You can get in touch with us on X. [27:27] My handle is at Scott McLean. [27:29] And make sure to use the hashtag AJCTC when you do. [27:32] Or drop us an email, countingthecosts at aljazeera.net. [27:35] That's our address. [27:36] There's more for you on our website, aljazeera.com slash ctc. [27:40] That'll take you straight to our page, which has individual reports, links, and entire episodes for you to catch up on. [27:47] And that is it for this edition of Counting the Cost. [27:49] I'm Scott McLean. [27:49] For the whole team here in Doha, thank you so much for watching. [27:53] The news is next here on Al Jazeera.