As Iran accepted U.S. President Donald Trump's demand to reopen the Strait of Hormuz and the two sides agreed to a two-week cease-fire, some analysts say the Iran war is having a partly positive effect on China's economy. They say the rise in oil prices caused by the blockade of the Strait of Hormuz has pushed up prices, easing China's deflationary pressure in part. As a result, there is now room for China's financial authorities to adjust the pace of currency easing.
According to Bloomberg on the 8th, unlike major countries that have faced inflation since COVID-19, China continues to face deflationary pressure. The prolonged real estate slump and a lack of recovery in domestic demand have kept demand weak, while price competition among corporations remains fierce. On top of that, uncertainty from the U.S.-led tariff war has piled on, and the People's Bank of China, the Central Bank, has kept cutting rates to boost the economy.
However, with the Iran war dragging on for more than a month, international oil prices have surged, and as higher oil prices stoke inflation, there is growing talk that China's economy may escape deflationary pressure. According to China's National Bureau of Statistics, China's consumer prices in February posted the biggest rise in about three years. Consumer prices for March, to be released on Apr. 10, are expected to rise further from the previous month under the influence of higher oil prices. Bloomberg also projected that the long-running decline in producer prices will gradually slow or turn to an uptrend.
Signs of change are also appearing in financial markets. After pumping money to support the economy, the People's Bank of China began to withdraw funds again in March, and the gap between long- and short-term bond yields widened. Typically, short-term rates reflect the near-term outlook and long-term rates reflect the outlook for the coming years; with long-term rates rising more, it is seen as reflecting higher inflation expectations ahead.
Accordingly, expectations for a rate cut by the People's Bank of China are fading, Bloomberg reported. Bank of America withdrew its forecast for two rate cuts by the People's Bank of China and raised its inflation forecast for this year. Bloomberg said, "A rate hike by the People's Bank of China is still a long way off, but the case for rate cuts is not as clear as expected."
Still, some say this shift is not entirely due to the Iran war. The Chinese government has steadily pursued policies to curb excessive price competition among corporations, and as a result, industrial profits in January–February rose 15% from a year earlier, showing signs of recovery. The real estate market is also showing some signs of stabilizing after a prolonged slump.
Bloomberg assessed that the rise in oil prices, combined with the easing of deflationary pressure from these government policies, further spurred the rebound in prices. Bloomberg said, "For China, the Iran war coincided with a favorable moment," adding, "The global inflation environment has not passed China by this time. This has allowed the People's Bank of China to shed some of its burden." It added, "Even if the People's Bank of China proceeds with monetary easing, it will be closer to a policy choice than a matter of urgent necessity."