Week signals: The Silk Roads ahead
Plus: watch points for Israel, Yemen, Russia, the US, and Pakistan.
Hello,
In this edition of Week Signals:
IN REVIEW. Old ties and new opportunities, the rise of the petroyuan, and the virtues of vicious cycles.
UP AHEAD. Israel's nuclear infrastructure, the Houthis, Russian oil, Trump's budget request, and Pakistani hubris.
And don’t forget to connect with me on LinkedIn.
The Week in Review: Middle to Far East
The week began with Brent crude at $112 a barrel. It ended at $112 a barrel, too. At several points down to $97, at one point almost $115, the price action tells you almost all you need to know about Donald Trump’s efforts at war and peace in the Strait of Hormuz.
There’s been little else to talk about. Even Ukraine’s efforts to damage 40% of Russia’s oil-exporting infrastructure at one point failed to get much attention (see more in the Week Ahead, below). It is seldom that so much of the world’s economy has rested on the actions of so few, i.e., a handful of mercurial old men in the White House, in Tehran, and in Jerusalem.
But there’s another grand old man – if 72 can be described as old anymore – who deserves more notice, and that’s Xi Jinping. While the short-term story is being set in the Middle East, what matters in the longer term is what the Europeans used to call the Far East.
This week, my colleague Oscar Martin is back with an examination of what the war in Iran means for China (an alternative view, from Chinese television, is here). Looking at the various scenarios we’ve explored in recent weeks – the good, the bad, and the ugly – what does each mean for Beijing, both in the region and beyond?
Oscar begins:
We recently argued that war over the Strait of Hormuz may do to the United States what the Suez Crisis once did to Britain. But there is another reason to keep 1956 in mind. It was also the year in which China began to make its first real diplomatic breakthrough in the Arab world. In 1956, Egypt and Syria were among the first Arab states to recognise the People’s Republic of China. China had fewer requirements, fewer historical debts to collect, and fewer pretensions to power. But today, with West Asian energy, Gulf capital and trade flowing more decisively toward East Asia, China has become indispensable to the region’s economy, and the region has become indispensable to China’s.
That centrality begins with energy. China gets about half of its crude imports from the Middle East and continues to buy significant volumes of Iranian oil. China is Iran’s largest trading partner, and its purchases account for around 90% of Iran’s oil exports. China holds strategic reserves estimated at around 900 million barrels, which gives it a useful cushion but not immunity from the current conflict. In that sense – and as the White House has tried to point out – the Strait of Hormuz matters more to China than to the US. When the Strait closes, it is Asia, and above all China, that still pays the bill.
Yet China’s interests in the region now go well beyond oil. At the first China-GCC Summit in Riyadh in 2022, Xi Jinping called for deeper energy cooperation, more LNG imports from the Gulf, and renminbi settlement in oil and gas trade. Yet it also called for something broader: big data and cloud computing centres, 5G and 6G cooperation, digital economy projects, and even joint work in space. It would help that, currently, Iran would not have an interest in striking Chinese data centres, unlike its threats to US counterparts. In December last year, Wang Yi said the conditions were finally ripe to conclude a China-GCC free trade agreement. While the US has long been the Gulf’s main strategic protector, China has been working its way into the region through trade, technology and infrastructure, and in the process making itself harder to ignore.
Iran sits differently within China’s regional picture. Beijing does not see Iran as an ally, but a sanctioned asset: a discounted supplier of oil, a useful test case for trading outside the Western system, and a state through which Beijing can extend influence without offering military protection in return. China remains Iran’s biggest oil buyer and signed a 25-year cooperation deal in 2021, but the relationship has always been commercial rather than strategic. China wants the benefits of Iran’s isolation more than it wants responsibility for Iran’s behaviour. The sanctions on Iran made crude cheaper and more politically manageable for Chinese refiners. Disruption in and around Hormuz, higher freight and insurance costs, and the general hardening of sanctions risk all threaten that advantage.
On the other hand, the same war strengthens China’s relative position in the Gulf. Washington’s way of exercising power has dragged Gulf economies into a conflict they did not choose, disrupted shipping, and shaken the commercial order the US is supposed to protect. That makes Beijing look, by comparison, like the steadier external partner. This is the two-sided logic behind China’s regional approach. It wants continued access to discounted Iranian energy, while also presenting itself to the Gulf as the power more interested in trade, stability and resumed business than in setting the region alight. That was part of the significance of the 2023 Saudi-Iran détente brokered in Beijing. China did not replace the US’s security role across the Gulf. Instead, it was trying to lower the temperature on both shores of the waterway through which so much of its energy trade still passes.
Iran is also using the war to push energy trade into Chinese currency. Markets are watching claims that some tankers may be allowed through Hormuz if the oil is sold in yuan. At least two vessels have already paid Hormuz passage tolls in China’s currency. This may indicate that the war is creating small experiments in selective de-dollarisation, with Iran using access to the Strait to reward China’s usefulness and tilt parts of the region’s energy trade away from the dollar.
And that is where the contradiction begins to favour Beijing. Economically, the war is clearly bad for China. But strategically, it may end up strengthening its position in the region. China has responded by calling for a ceasefire, sending its special envoy, Zhai Jun, on shuttle diplomacy, and warning of a “vicious cycle” that would damage growth and further destabilise the region. Goldman Sachs has already cut China’s second-quarter growth forecast and raised its inflation outlook because of the war.
But Beijing is also more buffered than many of its Asian peers because of its coal and renewables-heavy energy mix, its oil reserves, and its ability to reroute some imports. As a result, China is exposed but has also prepared for this eventuality and may still be in a position to benefit long term. And that brings us to the three scenarios Michael has been outlining since this war began. To our surprise, all three still remain in play.