As the United States and Israel enter the third month of military action targeting Iran, the weaknesses of China's low-cost, mass-production growth model are being exposed all at once.
Early in the war, some predicted that while the United States and Israel poured vast resources into the conflict, China would become a hidden winner by buying Iranian crude oil through sanctions evasion. But as the war drags on, analysts say China's massive strategic reserves are being depleted while it faces simultaneous, multi-pronged pressure from energy supply strains, rising manufacturing costs, and difficulties securing export markets.
According to a summary of foreign reports including the Telegraph and Reuters on the 5th, China's energy import lines have hit a ceiling. China is the world's largest importer of crude passing through the Hormuz Strait. Market intelligence firm Kep1er data show that in 2025 China brought in 49.4%—nearly half—of its annual imports of crude oil, refined products, LNG, and LPG from the Middle East. Half of its energy imports are tied to the Hormuz sea lane. After the war, in May this share fell to 31%. China is buying crude farther away and at higher prices from Russia and Brazil instead of the Middle East.
The supply situation for refined products is even worse. Refined products is a catch-all term for finished goods like diesel, jet fuel, and naphtha that come out after crude is run once through a refinery. Diesel that runs trucks and cargo ships, jet fuel that lifts planes, and naphtha used as a feedstock for plastics and synthetic fibers are all classified as refined products. The Middle East's share of refined products in China fell from 41% in 2025 to less than 1% in May this year, effectively cutting off supply. Crude can be stored in giant underground caverns, but refined products cannot. They are highly volatile and degrade quickly, leaving little suitable large-scale storage infrastructure. Middle Eastern LNG and LPG volumes also fell 43% between January and May.
Chinese corporations are under pressure from rising costs due to diversification of crude suppliers and the halt in Middle Eastern refined product supplies. In March, China's producer price index (PPI) rose 0.5% from a year earlier, turning upward for the first time in 41 months. Ben Cavender, managing director at the China Market Research Group, said in an interview with the Telegraph, "If you trace back through chemical processing or the petroleum products supply chain, price rises are clear. Access to feedstocks is becoming a constant headache."
The truly sore spot for Chinese industry is petrochemical feedstocks. More than half of the basic inputs that go into China's manufacturing—such as plastics, synthetic fibers, auto parts, and battery materials—come through the Hormuz Strait. According to analysis by global chemical market intelligence firm ICIS, in 2025, the Middle East accounts for 54% of the 86.6 million tons of naphtha imports for major Asian petrochemical countries.
The Telegraph, citing an on-site case posted on Chinese social platform Zhihu by a Chinese plastics processor, reported, "Prices of petroleum derivatives used as raw materials have doubled compared with before the war, and even then they change three times a day."
Normally, corporations raise product prices when costs rise. China's consumer economy now is not strong enough to absorb price increases. Industrial production in March grew 5.7% year over year, but retail sales that month rose only 1.7%. The cumulative retail sales growth rate in the first quarter was also just 2.4%. April auto sales, a gauge of consumer demand, fell more than 25% from the same period a year earlier. The first-quarter household savings rate was 37.8%, a record high excluding the COVID period.
Consumer sentiment in China has not recovered as before since the 2021 real estate bubble burst. Except for some major cities like Beijing and Shanghai, home prices are still falling. In China, where most household assets are tied up in real estate, falling home prices translate directly into weaker spending power. The consumer confidence index was 92 in February this year, just before the war, the highest in three years, but still low compared with the level that had never fallen below 100 before the bubble burst. Youth unemployment also still tops 17%.
Take BYD, the Chinese electric vehicle maker, as an example: this year, BYD's first-quarter net profit plunged 55% from a year earlier, falling to a three-year low. Inventory rose 16% in the same period. Forty-five percent of the cars BYD sold in the first quarter were exports. This is interpreted to mean that a structure has settled in where production that cannot be absorbed by domestic demand is being pushed overseas.
China posted a record trade surplus of $1.189 trillion (about 1,745 trillion won) last year. However, experts added the caveat that, as with BYD, more Chinese corporations are relying on exports in place of a collapsed domestic market. Thanks to strategic reserves, coal, and renewable energy, China also experienced less of an energy shock than other Asian countries, which supported its export competitiveness.
But this year, exports have also flashed warning lights. The shock waves from Hormuz did not hit China alone. Asian countries with smaller economies than China are suffering severe hardship from the Middle East–driven energy shortage. Asia's overall crude imports in April plunged 30% year over year. The Asian Development Bank (ADB) cut its growth outlook for developing Asia to 4.7% from 5.1%. That means the purchasing power of Southeast Asia, the Middle East, and emerging markets—which mainly bought Chinese home appliances, electric vehicles, and manufactured goods—has been eroded at the same time.
David Lubin, a researcher at the U.K. think tank Chatham House, said, "If trading partners don't want to buy a lot of Chinese goods, China can't sell a lot either." Consulting firm Rhodium Group said, "Deflation driven by overinvestment and overproduction will deepen, and factory closures will line up," adding, "The moment Western consumers stop buying, they (China) are finished."