The Iran war could end up helping China's economy — despite the short-term pain

• China is getting hit by the Iran war's oil shock, but its shift to electrification could soften the blow.
• Some of China's clean energy stocks are jumping as the war drives more demand for renewables.
• The conflict could chip away at dollar dominance in oil, lifting China's petroyuan ambitions.

The Iran war is a short-term shock for China, but it may also bring longer-term economic benefits for the struggling economy.

The world's second-largest economy relies heavily on imported oil. Disruptions to the Strait of Hormuz — a critical chokepoint for global crude — threaten to push up energy costs and weigh on growth.

But that headline risk misses a more nuanced reality.

"For China, Hormuz disruptions are certainly painful. Yet they also vindicate Beijing's bet on electrification," wrote Agathe Demarais, a senior policy fellow at the European Council on Foreign Relations, in a post on Tuesday.

The near-term hit is real as higher oil prices raise costs for manufacturers and squeeze consumers.

But the longer-term shift plays to China's strengths: the move away from oil. Electricity accounts for a much larger share of China's energy consumption than in the US or Europe, helping insulate it from crude price spikes, Demarais noted.

China has also spent years building buffers, with an energy mix that includes large domestic coal reserves, rapidly expanding renewables, and sizable crude stockpiles — leaving it better positioned than many peers to withstand shocks.

That makes China's economy relatively well set for "extreme scenarios," wrote Bank of America equity analysts in a Tuesday note.

There may even be an upside from China's prolonged economic slowdown.

"Having grappled with deflation for years, China should also have higher tolerance for some energy‑driven inflation," the analysts added.

Clean energy stocks are already surging

Markets are starting to reflect that shift.

Since the war began, China's CSI Green Electricity Index has risen about 10%, even as the benchmark CSI 300 has fallen roughly 4% amid a broader sell-off.

Battery giant Contemporary Amperex Technology has jumped 27%, while major renewable energy company GCL Energy Technology has surged 45%.

The moves suggest the conflict will boost demand for renewables — a shift that could benefit China, which dominates clean energy supply chains.

There's another advantage, too: China's grip on critical minerals.

Demarais wrote that rare earths — critical inputs in advanced weapons systems — are another area where China dominates processing, potentially giving Beijing added leverage as supply chains tighten.

At the same time, the war could begin to chip away at the US dollar's dominance in global energy markets.

Earlier this month, a senior Iranian official told CNN that Tehran was considering allowing some oil tankers to transit the Strait of Hormuz — but only if cargoes are settled in Chinese yuan.

"Even if just a fraction of transactions switches currency, the irony will be stark: A US-launched war will help normalise non-dollar energy sales, succeeding where years of Chinese diplomacy have not," Demarais wrote.

That feeds into a bigger question hanging over global markets: the future of the petrodollar.

The global oil market has been largely dollar-centric since the 1970s, reinforcing the currency's central role in trade and global savings. But that has been coming under pressure from shifting trade flows, sanctions, and alternative payment systems.

The Iran war could intensify those strains by calling into question US protection of Gulf energy infrastructure and the security of key oil shipping routes, Sachdeva wrote.

If the damage to Gulf economies worsens, they may be forced to pull back some of their vast overseas investments, she added.

"The conflict could be remembered as a key catalyst for erosion in petrodollar dominance, and the beginnings of the petroyuan," Sachdeva wrote.