Analysis:MiddleEastTurmoilRaisesChina’sSafeHavenStatus

As the U.S.-Israel-Iran conflict has roiled global markets in recent weeks, China has appeared relatively insulated from the energy-driven shock that is reshaping asset pricing worldwide.

The most immediate transmission channel is oil. With Brent crude having surged from around $70 per barrel to nearly $120 at its peak before pulling back after ceasefire news, the inflationary impact has rippled across economies. For China, while exposure to Middle Eastern crude is comparatively limited, the effect has still been felt domestically. Since March 9, gasoline and diesel prices have been raised repeatedly.

The inflationary pressure, however, remains manageable. Zhou Junzhi, chief macro analyst at China Securities Co. Ltd., noted that while oil prices will exert upward pressure on prices, the broader impact is contained.

Policy response will be critical. Targeted relief and subsidies for businesses and households will be important, alongside close monitoring of core consumer price inflation and the output gap, said Luo Zhiheng, chief economist at Yuekai Securities Co. Ltd. Crucially, he said, policymakers should communicate clearly that “the current rise in prices is mainly driven by external supply shocks and does not change the accommodative monetary policy stance” to anchor market expectations.

In contrast to the volatility seen across global assets, Chinese markets have demonstrated relative resilience. In March, the CSI 300 Index’s decline was broadly in line with U.S. stock losses, while the 10-year Chinese government bond yield was little changed, reflecting stable demand in the bond market.

The yuan has gained strength. Zhang Meng, a macro and forex strategist at Barclays, noted that the yuan is among the currencies least vulnerable to oil shocks, supported by China’s sizable current account surplus and continued foreign exchange inflows from exporters.

From an asset allocation perspective, this stability is increasingly attractive. Chun-lai Wu, head of Asia asset allocation at UBS Global Wealth Management’s Chief Investment Office, said recent volatility in Chinese markets largely reflects spillover from broader Asian movements rather than a shift in investor sentiment. “We have not seen particularly negative views from foreign investors on Chinese equities. On the contrary, since 2025, funds have recognized China’s breakthroughs in areas such as AI, and the investment thesis for Chinese equities has changed. Global markets now view China as a viable long-term investment destination for AI innovation.”

Despite a wide China-U.S. yield differential, international investors can hedge currency risk through swaps and other instruments, making returns on yuan bonds comparable to U.S. Treasurys, Wu said. Combined with relatively low inflation and fiscal prudence, this has helped sustain demand for Chinese assets.

At the same time, broader shifts in global capital flows may begin to work in China’s favor. A survey of global fund managers by Bank of America released in mid-March showed they remained overweight equities, particularly in emerging markets.

“We are already seeing signs of capital gradually returning to emerging markets,” said Li Changfeng, head of market strategy at AllianceBernstein, suggesting the conflict could catalyze a reversal of previous outflows.

Still, risks remain. Rising oil prices could feed through to inflation expectations, and global liquidity conditions may tighten if central banks respond more aggressively. For China, maintaining stable liquidity while managing imported inflation will be a delicate balancing act.

Beyond the immediate market impact, the conflict also carries longer-term implications for the international monetary system. Guo Kai, executive president of the China Finance 40 Institute, said that while the conflict may reduce the circulation of “petrodollars” in the short term, sustained high oil prices could reduce dependence on oil, weakening the petrodollar system’s support for the dollar.

“More importantly, this affects the credibility of the U.S. and the dollar,” Guo said.

This creates an opening for the yuan’s international role to expand. Miao Yanliang, chief strategist at China International Capital Corp. Ltd., cautioned that while declining dollar dominance creates space for multi-currency systems, China must still advance exchange rate flexibility to increase its currency’s global use.

The yuan’s key advantage lies in stability, according to Wu. The currency “neither appreciates nor depreciates rapidly, which is an important consideration for many equity and bond investors,” he said.

Contact editor Lin Jinbing (jinbinglin@caixin.com)