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, and an analysis said the Iran war is having a somewhat positive effect on the Chinese economy. The argument is that the inflationary push from higher oil prices due to the Strait of Hormuz blockade has actually eased some of China's deflationary pressure. As a result, there is now room for China's financial authorities to moderate the pace of currency easing.
On Apr. 8, Bloomberg reported that, unlike major countries experiencing inflation after COVID-19, China continues to face deflationary pressure. That is because the prolonged real estate slump and sluggish domestic demand are keeping demand weak, while price competition among corporations is fierce. On top of that, uncertainty stemming from the U.S.-led tariff war has piled on, and the People's Bank of China, the Central Bank, has been cutting rates continuously to shore up growth.
However, the Iran war, which has dragged on for more than a month recently, has sent international oil prices surging, and as oil prices stoke inflation, there is a possibility that the Chinese economy could escape deflationary pressure. According to China's National Bureau of Statistics, China's consumer prices in February rose by the most in about three years. The March consumer prices to be released on the 10th are expected to rise more than the previous month under the influence of higher oil prices. Bloomberg also projected that the long-running decline in producer prices would gradually slow or turn to an increase.
Signs of change are also being detected in financial markets. After flooding the economy with cash to stimulate growth, the People's Bank of China moved to withdraw funds again in March, and the gap between long- and short-term interest rates widened in the bond market. Typically, short-term rates reflect the near-term outlook and long-term rates reflect the outlook for the coming years, and the larger rise in long-term rates is seen as reflecting higher inflation expectations ahead.
Accordingly, expectations for a rate cut by the People's Bank of China are weakening in the market, Bloomberg said. Bank of America withdrew its forecast for two rate cuts by the People's Bank of China and raised its inflation outlook 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 a rate cut is not as clear as expected."
However, 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% year over year, showing signs of recovery. The real estate market is also showing some signs of stabilizing after a prolonged slump.
Bloomberg analyzed that the rise in oil prices coincided with a trend of easing deflationary pressure due to the effects of these government policies, further spurring a rebound in prices. Bloomberg said, "For China, the Iran war coincided with a favorable moment," adding, "The global inflation environment did not bypass China this time. As a result, the People's Bank of China has been able to shed some of its burden." It added, "Even if the People's Bank of China carries out currency easing, it will be closer to a policy choice than a desperate necessity."