Beijing won’t shout about it, but the American and Israeli attacks on Iran stand to benefit President Xi Jinping — by helping fend off the specter of deflation. The conflict may do some of the Chinese central bank’s work for it. Once a fairly uncontroversial prediction, interest-rate cuts look less of a sure thing.
Unlike most economies, China didn’t see the sharp spurt in inflation that followed reopening from the pandemic. Nor did the People’s Bank of China need to boost borrowing costs like the Federal Reserve or European Central Bank; it worried more that demand was languishing. But the spike in energy costs that’s followed the assault on Iran, and its retaliation, may give consumer prices the nudge they need to propel them from the danger zone. The PBOC can be more comfortable biding its time.
China, as the world’s biggest buyer of foreign oil and gas, is particularly exposed to higher prices. While the second-largest economy has made strides toward energy independence, a major chunk of its crude imports transited the Strait of Hormuz before traffic through the narrow waterway slowed to a crawl after the war began on Feb 28.
The PBOC lowered its key rate just once in 2025, contrary to the large easing tipped by many economists. Calls for further reductions this year have sensibly also been wound back. Consumer prices gained the most in more than three years in February, and will probably get a further assist from the jump in oil prices. The long stretch of declines in producer prices may also soon be over. (Figures for March are scheduled to be released on Friday.)
Markets are signaling that something has changed for the better. In its daily operations, the PBOC actually drained money from the financial system over the course of March. That’s an important shift; authorities spent the past few years trying to ensure there was sufficient liquidity rather than worrying about too much. The bond market is also indicating something is afoot: The yield spread between China’s five-year and 30-year notes, a gauge of inflation expectations and supply pressures, recently reached its widest in about four years. Interest-rate swaps signal waning investor bets on the PBOC paring borrowing costs.
This moves China closer to global norms. While a hike by the PBOC is a long way off, the case for a cut is nowhere near as clear as it looked. The Federal Reserve, which began the year in a mood to ease, is now suggesting it’s in no rush. Kevin Warsh, tapped by the White House to succeed Chair Jerome Powell, will strain to persuade the Federal Open Market Committee to reduce rates right away. In Europe, officials are adamant they won’t allow inflation to escape as it did after Covid and Russia’s invasion of Ukraine. Australia has hiked and, according to Bloomberg Economics, tightening is likely in Singapore and Japan.
So what does “good” inflation look like in China? There’s little chance that it will approach even half the post-Covid high of 9.1 per cent , notched in mid-2022. As optimistic as economists are that the bottom has been reached, the projections are still modest. Bank of America, which recently scrapped its forecast for two cuts by the PBOC, upgraded its estimates for consumer inflation to 0.7 per cent this year from 0.1 per cent , and anticipates producer prices to edge 0.3 per cent higher. That might not sound like much, but measured against a prior call for a retreat of 0.7 per cent , it’s noteworthy. (Unlike many of its counterparts, the PBOC doesn’t have a formal inflation target.)
The improved environment isn’t happening in a vacuum, nor can it all be attributed to Iran. Beijing has tried to discourage fierce discounting by firms, part of its so-called anti-involution campaign. Earnings by industrial companies showed modest gains in 2025 after years of declines, and in January and February, profits climbed 15 per cent from a year earlier. The property market is showing some signs of stabilization after a debilitating period of weakness. The conflict with Tehran has come along at a very opportune time.
The tendency has been to to focus on the negatives in recent years, just as it was considered impolite to talk about what might go wrong during China’s long boom. There are challenges: The trade war has eroded exports to the US and a declining birth rate is likely to challenge fiscal policy. And, if the disruption from the Iran conflagration tips the world into recession, China will also suffer. It has benefited enormously from freedom of movement on the high seas, and exports to the Middle East have performed strongly.
Let’s acknowledge for now that the shifting global inflation landscape hasn’t passed China by. It may even let the PBOC out of a tricky spot. If they do surprise us by easing, any reduction will be more of choice than dire necessity.
