1 Early assessment of the Iran war’s impact on China
Key developments in the US-Iran war
Feb. 28
The United States and Israel launched a massive, coordinated strike against Iran amid ongoing nuclear negotiations and a steady build-up of U.S. forces in the Middle East.
In an eight-minute video posted to social media, U.S. President Donald Trump said that his objective was to “defend the American people by eliminating imminent threats from the Iranian regime.” Trump also urged regime change, calling upon the Iranian people to “take over your government” and “America is backing you with overwhelming strength.”
Meanwhile, the Islamic Revolutionary Guard Corps (IRGC) reportedly told ships that they were not allowed to pass the Straits of Hormuz.
March 1
1. Iranian state media confirmed that Supreme Leader Ayatollah Ali Khamenei was killed during an Israeli airstrike on a compound in Tehran. Khamenei’s daughter, granddaughter, son-in-law, and daughter-in-law were also killed in the strike. Israel and Trump claimed that over 40 high-ranking Iranian officials and commanders were killed in strikes. Among the confirmed dead are Ali Shamkhani (secretary of Iran’s Defense Council), Abdolrahim Mousavi (chief of staff of armed forces), and Mohammad Pakpour (commander of the IRGC). Iranian state media said that a three-person council consisting of Iran’s president Masoud Pezeshkian, Supreme Court Chief Justice Gholam-Hossein Mohseni-Ejei and one of the jurists of the Guardian Council will temporarily assume all leadership duties in the country.
In response, Tehran launched retaliatory missile and drone barrages at U.S. bases in the region (Iraq, Syria, Gulf states, etc.), Israel, and their allies. Iran’s strikes hit energy infrastructure, airports, and military sites.
2. A Reuters/Ipsos poll found just one in four Americans approved of the U.S. strikes on Iran.
March 2
1. Fighting expanded to Lebanon, with Israel striking Hezbollah strongholds in Beirut. Iran broadened attacks to Gulf energy sites and U.S. embassies. Casualties rose, with Iran reporting over 550 civilian casualties (including over a hundred at a girls’ elementary school near a military base) while the U.S. reported six service members killed.
Ebrahim Jabari, a senior adviser to the Guards commander-in-chief, said that the Strait of Hormuz is “closed” and added that the IRGC and regular navy will shoot ships that try to pass through.
The US military claimed that it had struck over 1,250 targets in Iran since operations commenced. The US military’s Central Command (CENTCOM) said in a separate statement it had struck and destroyed 11 Iranian ships.
2. Trump outlined four objectives for the war during a Medal of Honor ceremony at the White House, including:
- Destroying Iran’s missile capabilities.
- Annihilating Iran’s navy.
- Preventing Iran from obtaining a nuclear weapon.
- Degrading Iran’s support for terrorism and proxies.
Trump also said his administration initially “projected four to five weeks” for the Iran conflict, “but we have capability to go far longer than that.” Meanwhile, Trump told the New York Post that he did not rule out sending U.S. ground troops into Iran.
March 3
1. Speaking to the press, Secretary of State Marco Rubio said that Iran is producing over a hundred missiles a month, compared with the U.S. making about six to seven ballistic missile interceptors a month.
2. The U.S. and Israel continued to strike key decision-making bodies in Tehran, including the Supreme National Security Council, Presidential Office, and Assembly of Experts building.
Meanwhile, Iran expanded its retaliation strikes to U.S. diplomatic missions in the region, including a suspected drone strike on the U.S. Consulate in Dubai, as well as strikes on the U.S. Embassy in Riyadh and Kuwait City.
March 4
A U.S. nuclear submarine sank the Iranian frigate IRIS Dena in the Indian Ocean off the coast of Sri Lanka using a torpedo, according to U.S. Secretary of War Pete Hegseth. Iran’s civilian death toll rose to about 1,045, according to Iranian state media.
PRC responses
March 1
In a call with Russian foreign minister Sergei Lavrov, PRC foreign minister Wang Yi said that the PRC has “consistently upheld the purposes and principles of the UN Charter and opposed the use of force in international relations.” Wang added that it is “unacceptable” for the U.S. and Israel to strike Iran during U.S.-Iran negotiations, as well as “blatantly kill the leader of a sovereign state and incite government change.”
Wang then urged an “immediate cessation of military operations,” a “prompt return to dialogue and negotiations,” and a “joint opposition to unilateral actions” where “the international community should send a clear message against any regression to the law of the jungle.”
March 2
In a call with Iranian foreign minister Seyed Abbas Araghchi, Wang said that the PRC supports Iran in “safeguarding its sovereignty, security, territorial integrity and national dignity and in upholding its legitimate and lawful rights and interests.”
PRC experts mocked
After the outbreak of the Iran conflict, Chinese netizens began mocking PRC experts for previously claiming that the U.S. would “not dare to attack Iran” and related commentary. For instance, Shen Yi, a professor at the School of International Relations and Public Affairs at Fudan University, once argued that a U.S. assault on Iran was unlikely because:
- Iran possesses the strongest ballistic missile and drone forces in the Middle East, making them capable of striking U.S. bases in the region and blocking the Strait of Hormuz. Also, U.S. bases, aircraft carriers, and Israel would not be able to cope with Iran’s retaliation.
- A U.S.-Iran war would impact America economically, triggering a surge in global oil prices and worsen inflation in the United States.
- Domestic support for the war in the U.S. is low and Trump has the midterm elections at the end of the year to consider.
- A conflict over Iran gives China and Russia an opportunity to expand their influence.
Backdrop
The Iran war comes after Trump’s tariffs were struck down by the U.S. Supreme Court in late February and before his scheduled trip to Beijing from March 31 to April 2.
Our take
1. Less than a week into the U.S.-Israel strikes on Iran, it is much too early to tell the impact of the conflict on the PRC. However, some preliminary observations can be drawn from how things stood before the war and after the initial developments.
i) Beijing’s energy situation is unlikely to be severely impacted by war in Iran, at least in the short term. Based on pre-war data from 2025 and early 2026 trends, Iranian oil constitutes about 11 to 14 percent of China’s total crude oil imports. In 2025, the PRC’s imports of Iranian crude were 13.4 percent of its total imports by sea, while Iran exported more than 80 percent of its oil to China. The main Chinese consumers of Iranian oil are independent refineries (“teapots”) most concentrated in Shandong and are not generally considered to be national priorities by Beijing.
Beijing is likely to step up its reliance on Russian crude as challenges to obtaining energy from the Persian Gulf increase as the war progresses (including the blocking of the Strait of Hormuz) and more Middle Eastern countries are impacted. Teapots, which operate on narrow and even negative margins and depend on imports of discounted oil from sanctioned countries to stay afloat, could be further squeezed. Rising energy prices stemming from the war will also impose a drag on China’s struggling economy. That being said, Beijing will not face an immediate crisis on the energy front given that it has significant amounts of crude held in storage and already started to reduce its imports from Iran this year.
ii) The PRC and Iran have a security partnership and Beijing has elevated its relationship with Tehran (“comprehensive strategic partnership,” or one step below the “all-weather strategic partnership” level that the PRC has with Russia, Pakistan, and others) in recent years. While Beijing previously sold weapon systems and dual-use technologies to Tehran, it has not provided Iran with security guarantees and looked unlikely to do so over the near-term as it sought to balance its relations with other Middle Eastern countries (Israel and the Gulf States) and the United States. Therefore, the PRC’s support for Iran in the early days of the war was limited to rhetoric.
Cheap energy aside, Beijing perceives strategic value in its relationship with Iran as the latter serves as an entry point for the PRC to expand its influence in the Middle East and is useful in tying up U.S. attention and resources that could otherwise be used to challenge the CCP. While Beijing is loath to lose a valuable partner, it also would not hesitate to abandon Tehran if it assesses that the regime is on its last legs. This would partly explain why the PRC has not explicitly condemned the U.S. and Israel following their strike on Iran. Going forward, Beijing will likely continue with its “wait-and-see” approach before deciding if it should make more tangible moves to back Iran and criticize U.S.-Israel military actions.
iii) The U.S.-Israel strikes on Iran delivered an embarrassing setback for the CCP’s ultranationalist “little pinks” and “wolf warrior” experts. At least one commentator, Renmin University’s Li Yi, appeared to engage the “reverse gear” in a recent video where he praised Trump for “capturing Maduro” and “decapitating Khamenei” while indirectly calling out Zhongnanhai by angrily stating that “we can’t even unify Taiwan.” Dismayed by Beijing’s inability to project power as the U.S. comfortably flexes its military muscles, other “little pinks” and experts could eventually join Li in expressing sentiments that are indirectly critical of the CCP regime. This could in turn lead to greater censorship in China.
Beijing, meanwhile, might be more worried about a successful, popular uprising in Iran against the authoritarian regime in Tehran. The CCP will undoubtedly be closely monitoring developments in Iran while preparing to “maintain stability” through heightened domestic surveillance, public discourse policing, and increased public security presence.
2. Major power competition between the U.S. and the PRC will almost certainly be affected by how the conflict in Iran pans out.
Should the U.S. and Israel meet their objectives and resolve the conflict within Trump’s stated timeline, Trump will go into his meeting with Xi Jinping at the end of March with substantial leverage and in a strong position to make more demands of China. Meanwhile, Xi and the CCP would be greatly troubled by the latest, successful U.S. campaign to dispatch a “dictator” and dethrone an authoritarian government. An increasingly paranoid CCP will step up “stability maintenance” measures in China, while ordinary Chinese will likely be inspired by the events in Iran to turn against Xi and the Party.
Conversely, should the U.S. and Israel fail to meet their stated objectives (even if they prematurely declare “victory”) within the stated timeframe, Trump will travel to Beijing in a much weakened political position compared to their last in-person meeting in Busan. Xi could take the opportunity to lecture Trump over his Iranian misadventure and pressure the latter to accede to PRC demands on tariff removal and Taiwan. If the Iranian affair drags on without any neat resolution or at least coming within measurable distance of its end, Xi and the CCP could be emboldened to make things harder on the U.S. with stricter export controls on rare earth (critical to America’s dwindling munitions pile) and dual use technologies, as well as stepping up material and financial support to Iran to keep the U.S. bogged down in its latest Middle Eastern campaign. Finally, Beijing will almost certainly find ways to exploit a “lame duck” Trump presidency and political turmoil in Washington, particularly should the Republicans lose control of Congress following the midterms in November and the Democrats move to hold the Trump administration accountable for starting a war with Iran without Congressional approval and other impeachable actions.
2 NBS’s statistical communiqué reveals problems with bureaucratic inaction
Beijing urges officials to shoulder responsibilities
Feb. 28
The PRC National Bureau of Statistics released the 2025 Statistical Communiqué on National Economic and Social Development, summarizing China’s development data in the final year of the 14th Five-Year Plan.
March 1
Qiushi, the CCP Central Committee ideological journal, magazine published 18 excerpts from speeches delivered by Xi Jinping between December 2012 and December 2025 under the title “Let Willingness to Take Responsibility, Courage to Take Responsibility, and Skill in Taking Responsibility Become Common Practice” (讓願擔當、敢擔當、善擔當蔚然成風).
Noteworthy points in the article include:
- Xi said that “practical work builds the nation, while empty talk harms it.” The Party’s cause “will face many major challenges, major risks, major obstacles, and major contradictions,” and leading cadres must possess a strong sense of responsibility.
- Xi said that officials’ willingness to take responsibility and act is both a political character trait and a fundamental duty of governance. One must not seek office without wanting to get things done, nor seek power without accepting responsibility. Officials are required to be “loyal to the Party and share the Party’s concerns,” and to “draw the sword in the face of major issues of principle, confront difficulties head-on when facing contradictions, step forward bravely in times of crisis, take responsibility for mistakes, and resolutely struggle against unhealthy tendencies and misconduct.”
- Xi said that leading cadres must not only have the awareness and determination to do things, but also the competence to accomplish them. Party discipline and entrepreneurial initiative are internally unified. Officials must properly handle the relationship between integrity and responsibility, and be willing to shoulder heavy burdens, tackle tough problems, and take on difficult tasks.
- Xi said that comprehensively and strictly governing the Party and encouraging officials to take responsibility are internally unified, not contradictory. Strictness is not meant to paralyze everyone or create a stagnant and inactive atmosphere, but to foster a clean and upright political environment within the Party. Organizations must combine strict supervision with care and support, implement the principle of the “three distinctions” (三個區分開來; i.e. distinguish between errors in reform versus violation of law, distinguish between unintentional slips versus graft, and distinguish between experimental errors versus personal negligence), and eliminate factors that hinder officials from taking initiative. In selecting and appointing personnel, whether a cadre dares to shoulder responsibility, is willing to work, and is capable of accomplishing tasks should serve as key criteria for evaluation, rewards, and promotions or demotions.
Backdrop
The PRC faces multiple political and economic pressures. China’s economy has been sluggish for years, and now faces the prospect of disruptions to its low-cost energy sources following U.S. action against Venezuela and Iran in 2026.
Meanwhile, the Xi leadership is stepping up anti-corruption investigations and indoctrination campaigns to ensure the political loyalty of the bureaucracy to Xi and the CCP amid an ongoing purge of the senior military leadership, as well as improve governing efficiency and security-oriented development amid rising economic pressures.
The officialdom has entered a critical evaluation period before the leadership reshuffle in the second half of 2026 in preparation for the CCP’s 21st Party Congress. Local officials, who are competing for seats on the Central Committee, could become increasingly cautious in performing their duties to avoid political missteps.
Our take
1. The PRC’s 2025 Statistical Communiqué on National Economic and Social Development provides macro-level evidence for analyzing bureaucratic inaction. It shows that despite extraordinary fiscal and political resource inputs in 2025, China’s endogenous growth momentum remained weak, and core indicators displayed significant signs of dysfunction.
According to the communiqué, China’s GDP growth rate in 2025 was 5.0 percent, slowing quarter by quarter (from 5.4 percent in Q1 to 4.5 percent in Q4). However, measured by the GDP deflator — a key gauge of real economic heat — the index is estimated at –1.0 percent. This means nominal GDP growth (about 4.0 percent) lagged behind real GDP growth (5.0 percent), indicating “deflationary growth.” When nominal growth is low, the real burden of debt repayment rises as price levels decline, directly constraining the reinvestment capacity of enterprises and the fiscal maneuvering room of local governments.
On the consumption side, the annual Consumer Price Index (CPI) recorded zero growth in 2025, while the Producer Price Index (PPI) remained in prolonged negative territory. This deflationary pressure reflects a systemic deficiency in total domestic demand, particularly as the private sector — facing falling asset prices (primarily in real estate) and an uncertain future — prefers precautionary saving over consumption to balance their balance sheets.
More tellingly, 2025 fixed-asset investment data reveal profound structural shifts. Nationwide fixed-asset investment (excluding rural households) fell by 3.9 percent year-on-year (with private investment shrinking sharply by 6.4 percent), the first annual decline since 1989. This marks a critical obstacle to China’s long-standing investment-driven growth model. Real estate, once accounting for half of investment growth, saw development investment plunge 17.2 percent, with new commercial housing sales area down 8.7 percent and sales value down 12.6 percent. As land-transfer revenues collapsed — falling to about 4.15 trillion yuan in 2025 from a 2021 peak of 8.7 trillion yuan — local governments’ infrastructure financing capacity was severely impaired.
As real estate recedes, the CCP government has directed resources toward manufacturing, specifically “high-tech manufacturing.” As a result manufacturing investment grew 0.6 percent in 2025, and high-tech industry investment performed strongly, with information services investment surging 28.4 percent. However, the CCP’s technocratic “guidance” of resources has also led to severe overcapacity and “involution-style” competition in some sectors. For example, the average gross margin of power battery firms fell from a historical 18–22 percent to 8–12 percent, with many firms nearing losses. Such profitless growth is not sustainable high-quality development, but rather a blind accumulation of capital induced by policy subsidies.
In China’s political economy, investment fluctuations largely reflect the mobilization capacity of local governments. Negative investment growth demonstrates that despite repeated central calls to “expand effective investment,” grassroots bureaucrats have become extremely conservative in project decisions. This loss of momentum is essentially the result of a “risk-aversion orientation” within the local bureaucracy. During the eras of Jiang Zemin and Hu Jintao, local officials enjoyed broad policy discretion and were evaluated primarily by GDP growth. However, Xi’s doctrine of “the Party leads everything” has tightly coupled financial regulation and local debt resolution with political evaluation.
Xi’s hardline stance on local debt dealt a hammer blow to investment in 2025. Under the deterrent effect of a lifelong accountability system for local debt risk, officials have chosen to prioritize debt balancing over development for political safety, leading to serious distortions in macro-policy implementation. Whereas earlier officials believed in “borrowing to build, leaving future generations to repay,” Xi’s special debt-resolution campaigns have repudiated this logic.
Although the central government arranged trillions of yuan in debt-resolution funds and new bond quotas in 2025, there was significant capital stagnation. Of the 10.29 trillion yuan in local bonds issued by local governments, about 3.59 trillion yuan was used to repay existing debt rather than fund new infrastructure projects. Consequently, infrastructure investment fell 2.2 percent, effectively extinguishing its role as a growth engine. For local officials, their primary focus has shifted from “securing projects and attracting investment” to “filing reports and balancing debts.” Under the sword of “lifelong accountability,” no rational official is willing to approve infrastructure projects whose costs cannot be recovered within their tenure. This contradiction between the privatization of responsibility and the centralization of power has created a terminal deadlock for the bureaucracy’s capacity to act.
2. The latest Xi article in Qiushi is tinged with a profound sense of crisis and the need for mobilization to overcome “lying flat” and inaction within the bureaucracy. The bureaucracy’s (in)action is a rational response to institutional distortion more so than the moral failings of individual bureaucrats. When Beijing’s demand that the Party “lead everything” brings economic management, financial supervision, and grassroots governance under the red lines of political evaluation — and when “self-revolution” evolves into an unending cycle of disciplinary purges — the bureaucracy’s risk appetite naturally declines sharply.
Under the framework of “self-revolution,” a single flaw discovered during a disciplinary inspection can end a political career regardless of how great one’s past achievements were in economic construction. Beijing’s “zero-tolerance” stance creates powerful incentives for risk aversion. Local officials have found that, in the current environment, the political gains from successfully completing a task are marginally diminishing, while the political risks — stemming from procedural flaws, debt risks, or issues related to public opinion encountered in the process — are infinitely magnified.
Xi’s Qiushi piece repeatedly emphasized that “strictness is not intended to manage everyone to death” and calls for the implementation of the “Three Distinctions” to encourage error tolerance. This mechanism, however, struggles to be effective in reality. The core issue is that the criteria for defining these “distinctions” are held entirely by the absolute authority of the disciplinary and supervisory departments, rather than being based on clear legal procedures. For a local official, what constitutes an “unintentional error”? What qualifies as an “exploratory experiment”? In different political climates, the interpretation of these definitions remains dynamic.
At the grassroots level, this manifests as a “procedural response” to work. Officials expend vast energy on “traceability management” — documenting every step to prove they strictly followed superior orders — while adopting stalling tactics or “buck-passing” when it comes to solving actual problems. When the consensus becomes “the more dishes you wash, the more likely you are to break one,” the bureaucratic class collectively chooses to “wash fewer dishes” or “wash none at all.” Xi expresses deep concern over this phenomenon, emphasizing that one “cannot merely want to be an official without wanting to do the work.” Yet he fails to fundamentally address the existential anxiety caused by the accountability system he personally established.
The deeper issue reflected in the Qiushi article is that Xi seeks a form of “mechanical initiative”: he wants officials to dare to take risks and create miracles as they did in the Jiang-Hu era, while simultaneously demanding absolute obedience and strict adherence to boundaries as in the Mao era. In a complex market economy, these dual requirements — “bold innovation” and “strict compliance” — are logically mutually exclusive. When the bureaucracy realizes that superiors demand not just results but also “political correctness” in every detail, the safest strategy is to wait for explicit written instructions from above, which can be compared with the broader socio-economic phenomenon of “lying flat.”
3. In summary, the contraction of investment and the loss of momentum facing the Chinese economy in 2025 are the direct side effects of Xi Jinping’s centralized power and high-intensity supervision. While he successfully dismantled the decentralized power structures left by his predecessors, Xi also simultaneously destroyed the bureaucratic incentive structures that underpinned growth for the past thirty years. Xi is currently trapped in a governance dilemma: he requires officials to exhibit the flexibility and pioneering spirit of a market economy, yet demands they maintain absolute obedience within the rigid Leninist framework.
This concept of “mechanical initiative” is logically self-contradictory. As long as “lifetime accountability” and “political security” remain the primary considerations for an official’s survival, no amount of administrative mobilization can translate into substantive economic growth. The data presented in the 2025 Statistical Communiqué is, in effect, an empirical analysis of the costs of centralization — it reflects how institutional friction has begun to neutralize the administrative efficacy of central directives.
This pervasive bureaucratic mindset — “the more you do, the more mistakes you make; the less you do, the fewer mistakes you make” — is causing the transmission mechanism of China’s macro-policies to fail. This implies that no matter how much liquidity the central government injects, it will struggle to penetrate the “resistance layer” of bureaucratic risk-aversion to reach and truly revive the real economy.
