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I'm Stephanie Flanders, head of Government and Economics at Bloomberg, and this is Trumppanomics, the podcast that looks at the economic world of Donald Trump, how he's shaping and shaking the global economy and what on earth is going to happen next. Well, it's the afternoon of Wednesday, the first of April in the UK, and we're well into the fifth week of a conflict in Iran that very few
of America's allies wanted or even now fully understand. They are, though, dealing with the economic consequences, biggest of which being energy prices and an Iranian stranglehold over the stretch ofform moves. Last week, we looked at this crisis as an exercise in economic state craft, one in which, against the odds, Iran seemed to be doing rather well. In this episode, we're looking east to consider the view of the crisis from Beijing. Like many, the Chinese government would almost certainly
prefer the conflict hadn't started. Brings instability to a region that's increasingly important and inflicts high oil and gas prices on an economy that relies on significant energy imports in a context of a still fragile domestic recovery. And yet, and yet, the fact that Donald Trump is once again demonstrating to the world his tendency to inflict wildly unpredictable and damaging swings in policy on his allies surely also
provides something of a strategic opportunity for China. It's leaders liking to say these days that it's China that is the stable and predictable world power. Well, discussing this, we have first making her Trump and Noomic's debut, Fran Wang. Fran is where in London for a few weeks, but in her normal life she's a lynchpin of our China Economy and government team in Beijing, having covered China's economy
for nearly twenty years. Fran, great to have you here, Thanks for having me and from our Washington, DC bureau Adam for our Adam is the senior geoeconomics analyst for Asia Pacific Bloomberg Economics, and he previously served as the senior advisor to Vice President Kamala Harris on the Indo Pacific space and Intelligence. He also has written a piece for US on how the war in Iran is changing
the relationship between the US and China. We had you on Adam last when we discussed the Trump Administration's National Security Strategy document back in December of twenty twenty five. I feel like we've had several national security strategies since then. But welcome back to the show.
Great to be here. It seems that things have certainly evolved since then.
Evolved is one word for it. Yes, we'll talk about the economy sort of traditional trumponomics fashion. We're going to be interweaving the economy and the geopolitics, and we will get to the economy in a minute. But Adam, you have written a piece for US overnight, the conclusion of which I thought set the stage rather well. You say the risk of Beijing from a prolonged Middle East war are real and a near term off ramp remains far from certain for now, though China has the opportunity to
leverage the situation to its benefit. So just give us a sense of how you reach that conclusion, and then we'll do some unpacking.
Of course, so I think you've set it up well on the intro. There's no doubt that Beijing does not look kindly on the instability growing in the region right now.
While they certainly have i'm sure some happiness and seeing the United States strategically dragged into another war in the Middle East that distracts them potentially from the Indo Pacific, as we'll talk a little bit about more, they're also just very worried about the long term potential for the Gulf to remain unstable, for oil supplies to be infrequent, and to put stress on the economy at a time when things are positive on the export side but still
struggling domestically, when with consumption not reaching the levels that they need to maintain the demand necessary for the amount of production they're doing internally. But at the same time, there's no doubt that there are real opportunities for Beijing in this moment, and we can kind of look at
that through three different lenses. The first is diplomatic. China has spent a significant amount of effort and breath pushing a narrative since Trump came to office that it is the United States, not China, that is bringing instability to the world, and that China is the real protector of the rules based international order and even the United Nations, and turning the narrative that was so persistent under pass administrations,
particularly the Biden administration, on its head. And while certainly I think most of the world has the perspective to realize that there is a lot of hypocrisy potentially and that those arguments from Beijing, the reality is that the actions of the United States has taken since President Trump came to office, starting obviously with the Liberation Day tariffs, moving towards the eventual bombing of Iran alongside Israel in June, then of course the midnight raid to seize Nicholas Maduro
f of Venezuela, and now this ongoing four plus week war in Iran. There is certainly appetite to accept this narrative in a way that there wasn't before, particularly among countries that are feeling the real pain of this instability and uncertainty. At the same time, diplomatically, China historically does not take particular interest in engaging in negotiations or trying
to lead piecework around the world. But here there's this rare opening for them to potentially drastically increase their role in the Middle East and their relations with key partners,
and that comes from a couple main drivers. The first being that they're one of the unique countries on this planet that have positive relations with Tehran and the Gulf built around a massive economic relationship with Iran as their primary economic conduit and partner, which is even dwarfed by the relations with the Gulf that obviously relies heavily on Gulf oil exports, but also a lot of economic trade.
And as a result, given the fact that the United States is now considering ending the war without addressing the flow of oil through the Strait of Hormuz and Iran's control of that, there is this potential for Iran to emerge as an intermediary negotiator to try and reopen the strait, and that's not only because of those ties, but also the simple reality that they are the largest purchaser of
the oil coming through the strait itself. Obviously, there's a lot left to determine there and chin It may not take that opportunity, but they certainly could more traditionally, though, there is a simple numbers problem here for the United States.
The US has expended a huge amount of its most advanced munitions in this conflict and continues to on a day to day basis, and the reality is that those long range missiles like Tomahawk cruise missiles and those defensive missiles like Patriot interceptors are essential for any sort of Indo Pacific contingency, whether that be the United States trying to protect Taiwan or act in protection of the Philippines and the South China Sea contingency, and all of that
leaves China in the mid term in a much better position, potentially militarily. The other part of that, too, is that we've seen a degradation in US assets through this conflict. We saw the loss of a command control aircraft called an a wax over the weekend, a strike that demonstrated some support that Iran maybe getting from countries like Russia.
But nonetheless, the United States has few of these capabilities left in the world, and while it is certainly working to reconstitute them, those are years away, and as this war is prolonged, we may see the additional losses that further undermined its strategic position and its ability to enact potentially its military plans in the Pacific. The last part of this, I think we shouldn't forget is simply watching
and learning from what the United States is doing. I think It's probably not lost to most people that this is the largest military operation the United States has undertaken arguably since the two thousand and three invasion of Iraq, and a lot has changed since two thousand and three in terms of the way of war and the way
the United States plans to fight a war. And so here China is both I'm sure, concerned by the effectiveness of US capabilities, but also learning from what they've seen so far and taking the opportunity to see how the US is integrating drones, new missile systems, and its air
power and naval power in a modern conventional fight. And I want to be clear, obviously a fight in the Indo Pacific, particularly over Taiwan, would have a very different character, but the tools would be the same, and there's much to be taken from this, and those who follow the know China actually built its modern military very much off of the lessons of the US invasion of Iraq in their early nineties and Desert Storm, and so here's another opportunity for them to learn and grow and be more
effective in any sort of contingency. Not to belabor this too much is simply economic. Is the reality that China has positioned itself through its massive growth in green energy, its own domestic energy industry, and its reserves of oil that is brought in over the last several years to be able to weather this storm, and not only weather the short term storm, but potentially serve as a gas
station for other parts of Asia. And we're starting to see that already with these small but important deliveries of key fuel stocks to the Philippines and Vietnam, and potentially more to come, building on goodwill, highlighting the unique role China can play as a stabilizing influence in the region and demonstrating that China is a country that can be prepared and can prosper through these types of crises. The
repercussions from this war are extreme. There is no doubt that countries are going to have to rethink their energy security and their China also stands to gain the China has become by far the largest producer of green and renewable energy technology in the world, and obviously the most capable, it seems and commercially viable source of electric vehicles, both of which are going to be in high demand as countries, particularly in Southeast Asia and Africa, seek to insulate themselves
from further crises.
Well, that's the fantastic survey. Thanks Adam. And actually, and you've also taken us a little bit onto the economy. We're going to touch on a few things and sort of go deeper into the economy. But a few things that Adam mentioned there it's worth remembering since we haven't talked about the Chinese economy for a while on this show.
The basic state of China's growth coming into this year, coming into this crisis, I mean it's recovering, but still quite subject to deflation and excess supply is still very dependent on exports. What's the basic state of the economy.
Yeah, the economy has been recovering since it reopened from COVID zero four years ago now or three to four years ago now. However, the recovery has always been like two speed, with production staying very strong but consumption struggling to pick up. And the key reason why production has been strong is because of exports, and exports contributed to nearly a third of GDP growth last year, which was
the highest since nineteen ninety seven. So exports have been a key support for China's growth, especially if you think about how long deflation has been plaguing the economy for years, and also domestic consumption has been so weak. Retail sales growth was still quite tapid despite government subsidized cash for
clunkers program for like two years. So really domestically, China's economy is still suffering from over capacity as you mentioned, and also years long housing slump which really battered consumer and business confidence most countries.
This is really an unwelcome shock, and I'm thinking, you know, I'm obviously sitting in the UK, but we're constantly doing the numbers of what it is going to mean for growth, for inflation, to have this significant rise in energy prices. I mean, China's not immune to that, right.
Yeah, I mean China has been suffering from deflation, so price rises should be welcome. However, it depends on how broad the price rise will be. Judging from the current situation, you could see that most likely beneficiary would be upstream industries, oil minerals, resources companies. Downstream companies will find it extremely hard to pass the costs onto consumers because completion is
still so fierce in the country. And if you think about how deeply rooted the excess capacity problem is The government has been launching the so called anti involution campaign for many many months now. The effect, however, is still
quite limited. Unlike ten years ago when a similar campaign was launched, this time around, companies suffering from overcapacity are in privately owned industries and sectors the government may want to support, like renewable energy, so that makes it harder for the government to take a strong handed administrative approach to addressing this issue this time around.
Such an ugly word, but they the involution. We should remind people what that means. I mean, the basic sense is that some of the reason that they've done so well in all these new technologies and other things in these industries is that they've got lots of companies competing. But that produces excess investment, excess supply.
Is that the basic yeah, and lead to workers working extremely long hours without properly compensated.
Which you could also say is a core part of the Chinese economic model. Just one last one for now for you, Fran again, just to remind us, because it's confusing when we talk about how they've built up their energy sufficiency, but they're also have been getting a lot of oil out of Iran. What is their capacity to withstand reduced supplies of oil and gas from the rest of the world.
Yeah, as Adam mentioned, China has been building oil reserves over the past few years. Some analysts put China's oil reserves as sufficient for meeting more than eighty days of refining needs. So I'd say there is no short term immediate shortage oil shortage concern. However, for long term, even though China has been pushing for more renewable energy for more than a decade now, renewable energy still accounts for
just about twenty percent of its total energy consumption. More than fifty percent of its energy consumption is met by coal, which China fortunately has abundant reserves of. However, if we want to reach present She's carbon neutral goals, and also if we don't want to repeat the serious air pollution problems were about decade ago, there's no way that China
can switch back to coal in a massive way. So there's always a trade off you have to balance, and I think this well, the war in Iran will just strengthen China's determination to expound further into renewable energy.
I guess on the one hand, China is trying to show off, it kind of got its strategy. It was ahead of the curve and preparing itself for these things. But it also wants to, where it makes sense, use some of its excess capacity or some of its strength in these sectors to make friends and influence people. So where are we seeing that?
I think the reality is that a lot of this was already underway, right the push, particularly in parts of Southeast Asia and even in Europe, to push heavily into renewables, and the reality being to do that in most industries, particularly solar and wind. You're really talking about Chinese technology. Certainly there are some European companies putting out wind turbines as well, but for Southeast Asia this is a China question.
And what we're seeing here now is less a new movement towards renewables, but rather an effort to revitalize and potentially speed up that transition. Now, you know, it's still very early going here. Were as much as this war seems to have gone on forever, it's only been four weeks. And if the crisis ebbs or starts to really stop here in the near term and the straight reopens, we may not see the same push with the same urgency
that people are talking about it now. But I think that right now that's where we would expect to see further growth. We've already seen big inroads from companies like BYD and other electric vehicle companies throughout Southeast Asia now increasingly Europe, and efforts to push into other regions in particularly in the Middle East. So I think all of that, you know, the Chinese stand to benefit even if there's marginal change in the near term.
This is an opportunity for China to sell its net zero technology and products to other goods. But also short term it can sell some fossil fuels to countries that have caught short. So what's happening there.
What we've seen so far is very much an evolution, you know, since the start of the war, as the air and the pipeline of oil to Asia kind of moves its way through and starts to hit Asian markets that's been created by the shutdown of the Strait of Hormuz. And for some countries like China, Japan, Korea, Australia, they've got reserves, they have options, they have budget flexibility. But for others, particularly in Southeast Asia, who have much tighter
fiscal realities. We're already starting to see this crisis turn into a shortage situation with key products, and we saw a declaration of an energy emergency in the Philippines. We've seen countries including Vietnam, Indonesia, and the Philippines discuss cutting flights between certain countries because of a lack of jet
fuel availability because of limited storage in those countries. And so far, the limited reporting we have on what China the actions China has taken is to try and address those immediate concerns in some of these countries, and that's been with the delivery of jets fuel and diesel and trying to provide a little bit of its refining capability
to meet its neighbors partners' needs. To keep in mind, this is also happening on top of the fact that China put in place and export ban on refined products almost immediately following the closure of the Strait of frommus which highlights how they are very clearly strategically thinking about how to deploy these refined products less for profit but more for diplomatic gain.
I'm struck because in other context we talk about there being really quite difficult relations with Philippines, the Philippines out in the ocean, when they're increasingly fractious territorial disputes. Is there any sense that that could come into any of these conversations.
I certainly can't speak to how Beijing is viewing this current moment, but the actions do speak clearly to the idea that they are both being flexible and creative in how they're utilizing these resources and seeing opportunity and seeing a moment to potentially reframe the discussion, even if marginally, in the domestic populations and the political environments in these countries.
You know, Vietnam is a very different situation in terms of its historic political relationship, but even there, it's obviously a stressed relationship over the South China Sea and broader competition between the two And so the fact that they were willing to move quickly to deliver, just to be clear, are relatively small cargoes but would have a tangible impact, you know, does say something about them thinking creatively about how to use their leverage in this moment, with the
idea that you know, they may not be able to do this for very long, depending on how long this conflict goes.
Mid Fran it sort of feels like, I mean, all these potential levers economic and diplomatic that the Chinese can be thinking about deploying now. I mean it speaks to this the level of sort of redundancy that they've built into their economy. I guess President she Jen calls it the fortress economy.
You know.
It feels almost a bit like, you know when they sort of try and reassure you about jumbo jets and they say, you know, there's a million things that go wrong, and we have got another engine, and we've got you know, all these different things that we can resort to. It feels like China has all these additional spare engines sitting there and alternative planes, and the rest of the world has left itself rather vulnerable despite having gone through the
COVID experience. Is this ultimately sort of bad news for the rest of us though, because it means that it's making the case for having all of this excess supply and redundancy in the Chinese economy, which, in if you're competing with Chinese products overseas, not much fun at all.
Yeah, I think the price competitiveness will be there to stay. And also in terms of policymakers thinking. President she himself and the polar Buro have repeatedly stressed on the so called bottom line thinking, which I think it's basically always think about what you can do in area of crisis,
even if your situation now is still quite safe. Our government sources, while speaking to us before, actually said frankly that one of the reasons that they are not in the rush to address of a capacity in sectors like renewable energy and other energy sectors is because of the possibility of a crisis like in a war. So and that was quite early, it was like a couple of years ago.
We should still remember though that you may have lots of spare sources of energy and back up this back up that one thing they haven't got as a backup engine is anything to replace foreign demand to fuel their economy. As you mentioned at the start, they're very dependent on foreign export. If this continues, the risk of a global recession is what not one that China is well prepared to withstand right now?
Right yeah, I think that would be a true concern for Beijing. If for demand collapse is because domestic demound I think in the past it was driven by two key sectors infrastructure and property. But infrastructure investment has been very inefficient now because of the saturation issue and because of the slowing pace of urbanization, and in terms of property, the government seems to be quite reluctant to repeat the aggressive stimulus it applied to rescue the sector back in
probably twenty to fifteen. I think one of the reasons is because they hope to replace property as a growth engine with more innovative tach sector growth. So that makes it quite hard for the Chinese government to really find another immediate replacement for foreign demand.
Of course, it's true of everybody. We're all wishing that it's not going to last too long. Of course, we tend to say the big disadvantage for China is how little it's used its military in fifty years, almost forty years. When people talk about this having in some sense lowered the bar for China to flex its muscles more than it already does militarily in Asia, is that a real prospect from this Because you've identified mainly diplomatic advantages.
I think the bigger impact on China's potential calculus is the capabilities of the United States, and that comes down to the drawdown of US munitions in this conflict and advanced capabilities that may be destroyed. As we were discussing briefly before, you know, just to put that in context, the United States from twenty twenty one to twenty twenty four purchased two hundred and forty seven cruise missiles or
Tomahawk cruise missiles. There's reporting now that the United States may have expended over twelve hundred of those missiles during this conflict. And I use that as just an illustrative example of the fact that the United States is simply not producing these tools at a rate to replace them in a timely manner. And while there's certainly a lot of focus now on an advancing the United States defense industrial base so that it can produce things faster, we're
not so far seeing the fruits of that. And so that means that in some critical capabilities, the United States may be less positioned to follow through with some of its planning for a military operation in the Pacific in the next couple of years. And so as China thinks about what it wants to do and it's freedom of action, it has potentially more flexibility in that space in terms of learning, though, I mean, I think your point is
spot on. What China desperately needs is military experience, and the reality being that the military hasn't conducted an operation of any sufficient size since nineteen seventy nine and the
border fight with Vietnam. And so there is a lot they can take from watching and learning from the United States, and they will have a lot of data to work with coming both from their partner and Iran their own collection assets, and I'm sure working and talking with the Russians there'll be a lot they can learn and try
and adjust their own planning to address. But at the end of the day, as you said, you know, the real test will be how they operate in a real scenario, and we simply don't know what that will look like. And so I don't think Beijing looks at this moment and says, ah, the window is now open for us to act, but simply that there is now opportunity for them to learn and grow their own military planning to potentially increase the odds of success when they choose to act.
We should look ahead briefly to the Shi Trump summit delayed, but we were hearing from Karen Levitt and others this week. It's very much on schedule now in for May Adam. How do you expect all these advantages and the sort of complex picture that we've painted over the last thirty minutes or so, how do you think that will play out in the summit? How is this Iran conflict going to affect the way that summit looks and feels, and what possible outcomes.
In many ways from the core outcomes that we're going to see in the objectives that both sides are moving
forward on. From a more technical level, I don't think we're going to see much change at all in the sense that the priorities that were put forward prior to the Iran conflict, about maintaining stability in the relationship, ensuring the flow of critical minerals and rare earth to the United States, finding a tariff level that both countries are comfortable with, increasing Chinese purchases, and potentially addressing the future of Taiwan are all issues that are still on the
table and have not shifted significantly because of the conflict
in and of itself. But at the same time, there's no doubt that the overall narrative of the visit could be significantly impacted with how the United States ends this conflict and whether it emerges victorious as the President has said, or somewhat damaged by their inability to potentially open the straight of the horn moves, leaving Golf partners in a position, you know, potentially worse than they were prior to the conflict in terms of broader instability and the risk to
the global energy supply chain. So I think that's really where we're going to see the impact. And I do think this is a good point to remind folks that for China, their relationship with Iran certainly has value to them, but at the end of the day, they're far more interested and concerned about their core needs and interest in
the region, which is energy supplies. And so while you know, bombing of Iran has been a major issue for Bijing and their pushback of on the administration for doing so, I see it highly unlikely that the President she spends much time talking about Iran in and of itself with President Trump outside of what President Trump wants to raise
during the meetings. The bigger question is where would they land on these critical issues that we've already gone over, and will the meeting go forward on the timeline that's been put forward, given the fact that we simply don't know right now when this war will end, and how that could impact both this meeting and the theoretically up to four additional meetings they're supposed to have this year.
You would have been in a position to plan some of these international meetings when you were sitting in the White House and working working for the Vice President. And you have to feel sorry for the skeleton team that they're now trying to even begin to think about how that summit's to play out. Fran I give you a little last word just on that summit. I mean you and I were in Hong Kong together not so long
ago talking about our expectations for the summit. Are you looking at that meeting from a different perspective now or expecting anything different to come out of it as a result of the last few weeks.
I just wonder how China would make anny gains in terms of asking the US to relax its tech export technology, or would it ask for it at all now? Given the progress Chinese companies have made, and probably they want to put up a phase of not afraid of being boycott or cut off from key technology. We can't always give up our own. And another point is I think the US will asks for China to buy a lot more agricultural products. I think that could be one of the major requests by the US.
Yeah, all those farmers who are hurting from well another reason now higher fertilizer prices, along with all the other ones that they've been given by this administration. Adam fran thank you so much, Thank you.
Thanks for having.
Thanks for listening to Trumponomics from Bloomberg. It was hosted by me Stephanie Flanders, and I was joined by Bloomberg Economics senior geoeconomics analysts Adam Ferrar and Fran Wang from Bloomberg's China Economy and Government team. Trumponomics was produced by Moses Dam with Summer Sadi and help from Amy Keen. Sound design was by Blake Maples and Kelly Gary. Please help others find us and enjoy this show, rate it and review it highly wherever you listen