China Macro Watch - On Iran, Trump-Xi, NPC and bullish data

China and the Middle East conflict: Impact cushioned

As the world’s largest oil and LNG importer, China will feel the effects of disruptions in the production and transport of energy in/from the Middle East, and the related spike in oil and gas prices (also see our Top-of-Mind note on Iran scenarios here). China imports almost 75% of its oil needs, and the share of imports coming from the Middle East is estimated at around 40%, with Saudi Arabia and Iraq the key suppliers. The total share of China’s oil imports coming from Iran is estimated to be around 10% (Venezuela was around 4%), and around one-third of oil and one-quarter of LNG flowing through the Strait of Hormuz is destined for China. Unsurprisingly, Chinese officials have called on ‘all sides’ of the Iran war to immediately cease military operations, avoid a further escalation and ensure the safe passage of ships through the Strait of Hormuz. Regarding China’s positioning in the Middle East conflict so far (‘relatively muted’), we should add that China’s interests in the region are much more economic than political. Moreover, China has stronger economic relations with US allies like Saudi Arabia and the UAE than with Iran.

In terms of the potential impact of the conflict, there are also some cushioning factors for China. The country has been stockpiling energy massively when prices were relatively low, and its total oil reserves are estimated at around 80 days of consumption. Its diversified import base also helps, and it looks likely that China can increase oil imports from Russia relatively easily. Moreover, China also has other energy sources at its disposal. Oil demand has peaked on electrification, including thanks to the rapid rise of EVs. The share of electricity created by renewable energy has risen sharply over the past few years, to almost 40% in 2025, as China has positioned itself as a global leader in the energy transition. Nevertheless, last week the Chinese government told large oil refiners to suspend the exports of diesel and gasoline in light of the Middle East conflict. While a (sustained) shock in oil and gas prices would be inflationary, China’s starting point in terms of inflation is more favourable compared to for instance the US or Europe. Still, a firmer inflation path would probably make the PBoC even more cautious in terms of additional (piecemeal) monetary easing.

The coming Trump-Xi meeting: Safeguarding the fragile equilibrium

Regarding US-China relations, the Iran conflict could complicate (preparations for) a meeting between presidents Trump and Xi scheduled for end March/early April. Preparatory talks between US Treasury Secretary Bessent, US Trade Representative Greer and China’s Vice PM He are planned in Paris this weekend; the same officials were also part of the Geneva truce talks in May 2025 and follow-up meetings last year. We still think both countries have clear incentives to keep the bilateral relationship in relatively calm waters for now. Last weekend, China’s Foreign Minister Wang stated 2026 could become ‘a landmark year of sound, steady and sustainable development of China-US relations’, even though he lamented the escalation in the Middle East. We think the main goal of the meeting is to keep the relationship relatively steady, preventing a flare-up of tariff increases or a tightening of chokepoint-related restrictions. China seems to be one of the key beneficiaries from the US Supreme Court ruling (also see our Top-of-Mind note on the SCOTUS ruling here), but the US will likely be somewhat cautious in re-installing higher tariffs on China post-SCOTUS. The fact that they did not immediately install Section 301-tariffs on China is a case in point. China may reiterate its commitment to buy more US soybeans, other farm products, and Boeing planes in return for stability on the tariff/chokepoint front, and may also ask for an easing of some tech/semiconductor restrictions. Breakthroughs on more fundamental trade and geopolitical issues (including Taiwan) are less likely for now. In the China update in our February Global Monthly we already noted that while China’s external surpluses have increased in 2025, its bilateral trade surplus with the US had fallen.

Key take-aways from the annual March political/policy sessions

One of the closely watched announcements made during the annual policy sessions traditionally held in early March is the GDP growth target. The 2026 target was set at ‘a range of 4.5% to 5%’, in line with our expectations. Compared to a growth target of around 5.0% for the past three years, this marks the first small ‘downgrade’ since 2023. This fits within a broader trend where Beijing attaches more value to the quality of growth than to just plain numerical growth numbers. Our current 2026 growth forecast of 4.7% (slightly above consensus) is still in line with this target range. On the one hand we see upside risks to our forecast on the back of a strong global business/tech cycle (see below), but of course we also see additional risks from the Iran conflict (on top of prevailing risks related to supply-demand imbalances and potential trade tensions). We will publish revisions to our growth and inflation forecasts, if any, in our March Global Monthly later this month.

Meanwhile, China’s inflation target for 2026 was kept at 2%. This should still be seen as a ceiling, with the government’s work report stating it will aim for overall prices to turn positive from negative (the Iran conflict may ‘help’ in that respect). Meanwhile, the target for the headline fiscal deficit was left unchanged at 4.0% of GDP, and the quota for the issuance of ‘special purpose’ local government bonds and ultra-long sovereign bonds were also kept constant. Beijing plans to come with an additional CNY300 bn issuance of special treasury bonds to recapitalise large state-owned commercial banks, down from a similar CNY 500bn facility last year. All of this means that the (additional) fiscal impulse will be less than in 2025, with Beijing putting more emphasis on fiscal sustainability. This should be seen against the background of more stable US-China relations compared to last year, and the expectation that exports will stay resilient (see below). The fiscal stance also implies that support for consumption will stay targeted rather than ‘bazooka-style’. The consumer goods-trade in programme will be scaled down and finetuned a bit, although household income will be supported somewhat by changes in social welfare programmes (pension, childcare, education) initiated last year. In line with our expectations, a shift towards investment support is also visible (reflecting the reported downturn in investment last year), as a special facility for policy banks to fund investment projects was raised to CNY800bn in 2026 (up from CNY500bn last year).

The final version of the fifteenth Five-Year Plan covering 2026-2030 was also presented. Tech development and China’s aim to become world leader in high-tech sectors like robotics and AI remains the key driver, although the government continues with its attempts to contain the excesses stemming from this (the campaign on ‘involutionary competition’). At least in the wording of the plan one can see that the leadership has become more sensitive to the criticism that the position of the Chinese households/consumers is often overlooked. However, as concrete targets are not included on this front and the share of consumption will rise anyway due to the end of the investment/property boom, this looks to be more about political profiling than about preparing for a meaningful additional stimulus campaign to really address domestic supply-demand imbalances.

Recent macro data have turned more ‘bullish’

Due to the Lunar New Year break (this year mid-February), Chinese macro data are relatively scarce at the start of each calendar year, as some January/February data are combined and published in March. The picture emerging from the recently published data is a relatively bullish one. February PMIs were rather mixed, with a remarkable divergence between weak official PMIs (focus on large state-owned firms) and strong RatingDog PMIs (more concentrated on exporting firms). This divergence is symbolic for ongoing domestic imbalances. The export-oriented PMI survey from RatingDog is positively impacted by the firmer global business cycle, driven by the tech/AI boom, with the export subcomponent in this survey jumping to a 5.5-year high in February. That was also a prelude to the remarkably strong export growth reported for January/February combined (+21.8% y/y ytd), beating all forecasts with a wide margin (consensus: 7.2%). This seems to be partly related to firming of the global tech cycle. Exports to the US reported for February alone (not reported so far for January) were up by 9.7% y/y, following deep annual declines since the start of the tariff war in April 2025. This signals some recovery in bilateral trade following earlier tariff reductions, but could also point to another round of frontloading (as some exporters may fear new post-SCOTUS tariffs). February inflation data also turned out to be more ‘bullish’ than expected, with headline inflation rising to a two-year high of 1.3% y/y driven by relatively solid LNY spending and rising commodity prices, but also by base effects. Core inflation even jumped to a seven-year high of 1.8% y/y, while the annual pace of deflation in producer prices eased further. All in all, on balance a quite bullish data picture, just before the escalation of the Middle East conflict and the scheduled Trump-Xi meeting.