The conflict between the United States, Israel, and Iran is accelerating the reshaping of the global political and economic order. Against this backdrop, this report focuses on analyzing the impact of this conflict on mainland China and Hong Kong, sharing recent research insights and reflections.
Where to begin
The US-Iran conflict has persisted for nearly two months, currently entering a negotiation phase with significant uncertainty. There are three main potential trajectories for the conflict's future development. The first is the ongoing negotiation process, with repeated cycles of fighting and talks. The second is the complete breakdown of negotiations, leading to a full-scale escalation and inevitable ground war. The third is successful negotiations, where both sides achieve a balance and declare victory. The high degree of uncertainty stems from the dynamic power shifts among the involved parties and differing analytical frameworks, whether based on economic logic, political logic, US domestic elections, or the resilience of the Iranian regime itself.
The United States likely initiated this military action against Iran at a time it deemed most opportune and advantageous. Over recent decades, Iran has persistently challenged US regional dominance. The US chose this moment to act, a core reason being that Iran's key supporter, Russia, is deeply mired in the Ukraine war and cannot provide substantial, strong support. With Iran lacking air superiority and external strong backing, this presents a critical test for the US to validate its status as the world's preeminent military power. The outcome of this war will determine whether the US remains a valuable and deterrent global military leader.
However, Iran is also exploring countermeasures. A significant low-cost option for Iran is to blockade the Strait of Hormuz, a move with potentially greater deterrence than nuclear weapons. Reports suggest Iran's parliament is set to approve a "Strait of Hormuz Management Law," aiming to place the strait under complete Iranian control. While such an outcome would be a historic victory for Iran, providing long-term revenue, for the US, the conflict-driven rise in energy prices and living costs is a political liability for the current administration, making this an unlikely final scenario.
Based on the current standoff and dynamics, the most probable escalation path is a ground war. The nature of such a war depends on US-Israel targeting priorities. If focused on Iranian ground forces, it could trigger a full-scale Iranian counterattack and a comprehensive ground war. If limited to destroying nuclear facilities and military bases without directly targeting ground troops, a more limited ground conflict might ensue. The difficulty of a ground campaign is significantly higher due to Iran's characteristics as a powerful, centralized theocratic state with a highly efficient and cohesive state apparatus, unlike more fragmented nations. The US's strategic objectives for such a war are clear: to facilitate a regime change in Iran and to compel Iran to completely abandon its nuclear program.
Key impacts of the conflict
The conflict has significant effects on energy prices, the global political and economic landscape, supply chain security, and capital markets.
Following the outbreak of conflict, international crude oil prices surged, disrupting global supply. However, the long-term impact is limited as oil is not a globally scarce resource. The global oil landscape can be reconfigured and rebalanced relatively easily. Even if Gulf production halted completely, the world could achieve a new energy balance in the short term. While the US, now a top oil exporter, might seemingly benefit from higher prices, the economic logic is more complex. Rising oil prices significantly stimulate inflation. For China, rising oil prices and other factors contributed to a positive shift in the Producer Price Index (PPI) in March, laying a foundation for economic recovery. The Consumer Price Index (CPI) rose 1.0% year-on-year that month, with a target of maintaining it around 2%.
The conflict is further restructuring the global political and economic order. In Europe, the war is prompting a re-evaluation of its role, most directly seen in major adjustments to NATO defense spending commitments. The potential for Europe to re-arm and restart its manufacturing base, thereby becoming a more independent force distinct from the US, is a key area to watch. In Asia, the region faces an energy security stress test. Asia is highly dependent on oil, with Japan, South Korea, and China heavily reliant on Middle Eastern imports via the Strait of Hormuz. China's oil dependence has soared to 70%, largely due to structural changes in its industry, where oil is now a crucial petrochemical feedstock. China possesses robust defenses against energy risks, including ample reserves, diversified import channels, and a rapid shift towards new energy sources.
The restructuring of the Gulf region itself, with the US playing a pivotal role, is highly significant. Control over the Strait of Hormuz is a critical variable, with potential for new regional alignments between Shia-led Iran and Sunni-led Arab states, heavily influenced by US involvement.
Global supply chain pressures have intensified sharply, and supply chain layouts may face adjustments. The conflict directly leads to significantly higher shipping costs. Key global shipping chokepoints like the Strait of Malacca are closely monitoring the situation, as deterioration could impact global shipping, affecting both operational costs and geopolitical security.
Hong Kong's status as a global capital safe haven has been reinforced, with some Middle Eastern capital flowing into the city. Compared to Singapore, which faces pressure from adjustments in Malacca Strait shipping volumes, Hong Kong has emerged as a notable beneficiary in this regional shift. Market estimates suggest over a trillion in funds have flowed into Hong Kong since the conflict began. This capital is not only held as deposits but is also invested across financial products, with the Hong Kong stock market, due to its strong profit potential and growth expectations, becoming a core allocation target.
China's economic resilience and structural pressures
In the short term, the Middle East conflict has had a relatively limited impact on China's overall economy. The first quarter demonstrated resilience, characterized by a "two-sided" performance: strong technological innovation and exports, alongside persistent structural issues like insufficient domestic demand and pressure on small and medium enterprises.
China's economy had a solid start to the year, showing resilience. First-quarter GDP grew 5% year-on-year. A notable change was the GDP deflator ending its previous negative trend, approaching zero.
Economic recovery is supported by multiple factors. Firstly, foreign trade showed strong resilience, with first-quarter export value growing 14.7% year-on-year. While March exports were affected by the Middle East conflict, the overall quarterly performance remained robust. The concept of "front-loading exports" needs re-evaluation; the sustained export strength demonstrates China's industrial foundation and core competitiveness. Secondly, new growth drivers continue rapid expansion. Technological innovation has become a core engine of growth, with vibrant activity among young entrepreneurs and investors in tech sectors. Thirdly, policy support was front-loaded. Infrastructure investment, growing 8.9% year-on-year in Q1, was a main driver in halting the previous decline in overall investment and turning it positive.
However, structural pressures on economic recovery persist, and the US-Iran conflict has a dual impact on China's exports.
It is crucial to rationally assess the impact of imported inflation and seize the opportunity for price increases. China's economy exhibits a pronounced "two-sided" feature. While tech and exports are strong, most other sectors face difficulties, especially downstream industries and SMEs pressured by rising oil costs. The structural contradiction of "strong supply, weak demand" leads to low market prices and intense industry competition. Rising upstream costs like oil can help lift overall price levels, but when terminal demand is weak, these costs are hard to pass on, squeezing profits for downstream consumer-facing private enterprises.
The US-Iran conflict's impact on Chinese exports is two-fold. On the negative side, as the world's largest oil importer, China faces supply shocks, though it mitigates this with vast reserves, diversified supply channels, and new energy development. Also, global economic slowdowns reduce import demand, particularly in key markets like Southeast Asia. On the positive side, the conflict highlights China's competitive advantage. As geopolitical conflicts raise production costs and disrupt supply chains elsewhere, China's complete supply chain system and strong supply capacity make it less impacted, further凸显ing its export competitiveness.
The pattern of strong supply and weak demand has not fundamentally changed; weak domestic demand remains the main shortcoming. The core issue lies in insufficient effective domestic demand, with both consumption and investment growth lagging behind industrial production. In the consumption sector, growth remains tepid. Weak final consumption stems mainly from two factors: the weakened wealth effect from declining asset prices (especially in real estate) and employment pressures, particularly for youth, coupled with slowing income growth.
Policy directions: expanding demand and optimizing supply
To address high external uncertainty and the domestic "strong supply, weak demand"矛盾, efforts should focus on expanding domestic demand as a breakthrough, using technological innovation to reshape momentum, acting on both supply and demand sides to stabilize prices and the economy.
On the demand side, the focus is on comprehensively expanding domestic demand and stimulating market vitality. This involves boosting residents' consumption capacity and willingness by increasing incomes, especially for low-income groups, and enhancing property income. Policies should also promote new types of consumption, service consumption, and fully utilize holiday economies. Furthermore, it's vital to expand effective investment by stimulating investment活力 from all market entities, particularly improving the business environment to restore private enterprise confidence and boost private investment.
On the supply side, the emphasis is on intensifying technological innovation and better leveraging the "new national system" in advancing science and technology. The strength of supply should come from substantive leaps driven by innovation. China's "new national system" is a key tool, now understood not just as state financial support for strategic sectors but also as a mechanism to guide social capital towards national long-term strategies. A typical example is in capital markets, where listing policies prioritize enterprises aligned with national strategic directions, even if they don't fully meet traditional listing criteria. Meanwhile, the Hong Kong market plays a crucial complementary role as a highly market-oriented international financial center, providing a platform for high-quality enterprises that may not fit the mainland's strategic focus listing criteria.
Overall, the world order is undergoing profound changes. In this process, China's economic growth follows its own internal logic, which is independent and stable, unlikely to be easily altered by distant regional wars. Such geopolitical conflicts are neither likely to cause massive shocks nor provide significant boosts to the Chinese economy. Therefore, China's core response is to maintain strategic focus and steadfastly manage its own affairs well.
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