Iran’s war threatens China’s energy lifeline — buffers exist, but risks remain

Immediate energy shock: a painful but not fatal hit

It has been reported that strikes by the United States and Israel on Iran on February 28 have sharply curtailed Iran’s oil output and interrupted Gulf shipping, creating an immediate gap for China’s energy imports. China (中国) is the world’s largest crude importer and has long diversified suppliers and built strategic stockpiles. Still, Middle East supplies remained sizeable in 2025: roughly 40% of China’s crude imports and nearly one‑third of its liquefied natural gas (LNG) came from Gulf producers, and Chinese imports from Iran reached as high as about 1.0–1.4 million barrels per day — roughly 13% of China’s crude imports and some 80–90% of Tehran’s exported oil. Can Beijing absorb that loss without economic pain? The short answer: only up to a point.

How China has insulated itself — and where exposure persists

Beijing has taken deliberate steps to reduce vulnerability: strategic stocks of roughly 1.3–1.4 billion barrels (about four months of imports), greater purchases from Russia by pipeline and sea, and the use of the yuan payment channel — China International Payment System (CIPS, 人民币跨境支付系统) — to facilitate some sanctioned trade outside SWIFT. It has been reported that the 2021 China‑Iran 25‑year cooperation agreement (中伊25年合作协议) included deeply discounted oil terms totaling as much as $400 billion in promised trade and investment; many of those barrels historically flowed to smaller, independent Chinese refiners (地方性炼油厂, “independent” or “local” refineries) to avoid reputational and financial sanctions risk. Yet physical choke points matter: the Strait of Hormuz — carrying about 20% of global seaborne oil — remains highly consequential, and some reports say multiple Chinese vessels were held up in the Gulf while others reportedly secured passage. Insurance and rerouting costs could spike if the strait stays contested.

Broader economic ripple effects and policy constraints

Higher oil and freight costs would reverberate across China’s economy. Models suggest a 25% rise in oil prices could knock about 0.5 percentage point off Chinese GDP, while global cost‑push inflation from a prolonged Gulf closure could lift world inflation by 0.4–0.8 percentage points and slow demand for Chinese exports. Beijing’s fiscal room to shield consumers looks limited: subsidies have favored industry, the 2026 fiscal deficit target was not raised, and accelerating consumer support would compete with other priorities. That matters because China still depends on external demand to hit a relatively high growth target (around 4.5–5%), and a sustained global slowdown would exacerbate domestic overcapacity and weak wage growth.

Geopolitics, supply chains and Europe’s role

Sanctions, payment networks and geopolitics shape the options available. Using CIPS to settle some flows and boosting Russian pipeline supplies help, but pipeline capacity is near full and maritime logistics and insurance remain bottlenecks. If Gulf shipments falter long term, China’s relative resilience could nonetheless sharpen its export competitiveness versus strained Western producers — but only if external demand holds. Europe, which takes about 15% of China’s exports and is acutely sensitive to energy shocks, could be a decisive swing factor: a severe European slowdown would feed back into China’s export outlook. In short, Beijing has prepared buffers — strategic stocks, supplier diversification and payment workarounds — but the Iran conflict still poses a potent test of China’s energy security and the resilience of its external‑demand‑led growth model.