Has the War in Iran transformed China into the world’s top safe-haven investment destination?
Energy security, supply chain resilience and strong policy continuity seen as enhancing the lustre of Chinese assets.
Public discussion of the war in Iran has focused heavily upon its impacts on the balance of power between China and the United States, almost as much as it has upon the direct parties to the conflict themselves.
Speculation is rife as to whether China will emerge as the real winner or loser of a regional conflict in which it isn’t a direct participant, but which is nonetheless poised to heavily impact its economy via the global energy market.
Some pundits point to the heightened trust and prestige that Beijing could accrue, thanks to the perception that it’s a calmer and more responsible global power than existing alternatives.
Others highlight China’s vulnerability to an oil shock, given its status as a vast manufacturing economy dependent upon imported sources of energy.
One prominent financial commentator argues that China’s economy has already reaped tremendous benefit from conflict in the Middle East, thanks to the heightened lustre given to its asset markets.
Fu Yifu (付一夫), senior researcher at Xingtu Finance, believes that the war in Iran has served to spur the elevation of China’s financial assets to the status of safe-haven investments, fast approaching parity with US-based assets and bullion.
In a recent opinion piece for Yicai, (‘中国资产有望成为全球资金的“避风港”‘) Fu highlights the contrasting performance of US and overseas asset markets as of the end of March and the first month of the year.
“This should have been a time for traditional safe-haven assets like gold and US Treasury bonds to shine,” Fu writes.
“On this occasion, however, the market has played out a completely different script.
“Gold has fallen below $4,200 per ounce, erasing its year-to-date gains. US Treasury yields have climbed, causing a price crash; and traditional safe-haven assets appear to have collectively failed.
“Meanwhile, Chinese assets have shown remarkable resilience, with the Shanghai Composite Index returning above 3,900 points.”
Fu argues that long-term strategic decisions by Beijing over the past decade have helped to pave the way for the emergence of China as a redoubt of safe-haven assets for global investors.
These include the shoring up of energy security, the creation of resilient domestic supply chains, as well as Xi’s commitment to stable macroeconomic policy and the development of China’s capital markets.
China has shored up energy security
Observers who believe the fallout from the war in Iran will be an adverse event for China highlight the impact of oil price volatility, particularly on a vast manufacturing economy that sources much of its energy from abroad.
Fu contends, however, that China has effectively shored up its energy security in recent years, given Beijing’s keen awareness of its critical importance of the industrial sector in tandem with worsening geopolitical tensions.
“Energy is the foundation for all industrial activity,” Fu writes. “China, however, now possesses a unique immunity to energy shocks.”
Fu says the first layer of this immunity lies in the structural diversification of the Chinese energy sector.
He cites data indicating that in 2024, crude oil and liquefied natural gas only accounted for 28% of China’s “one-off energy consumption” - the lowest in the world.
“While Japan, South Korea and other nations are over 80% dependent upon external sources for their energy, China’s one-off energy self-sufficiency rate is as high as 83.2%,” Fu writes.
“This disparity will naturally transform into a decisive competitive advantage when oil prices surge.
“For example, while foreign factories may be forced to stop work due to surges in power costs, Chinese manufacturing will still be able to continue thanks to relatively stable prices.”
A further layer of immunity is provided by Beijing’s long-term strategy of pursuing a transition in its energy sector towards more renewable sources.
“In just the past decade, alternative energies such as nuclear, wind, solar and hydropower have seen their share of China’s power generation rise from 26% to 40%,” Fu writes.
“What’s worth noting is that China isn’t just the world’s largest importer of crude oil and liquefied natural gas, it’s also the world’s largest investor in alternative sources of energy.
“These investments cover power sources, technological innovations, energy infrastructure and even modern petrochemical plants.”
Fu believes that this composite strategy of “coal at the base, oil as the supplement, and rising use of non-hydrocarbons” has created a diversified and stable energy supply system, providing a sound safeguard for China’s industrial base.
Supply chain resilience since Covid and Trump
In addition to energy, China’s top policymakers have also become heavily preoccupied with the security of the nation’s domestic supply chains, in the wake of both trade tensions with Trump as well as the impacts of Covid-era lockdown measures.
This was most recently made evident by the State Council’s release on 7 April of the “Regulations on Supply Chain Security” (国务院关于产业链供应链安全的规定), targeting the potential for foreign interference in China’s industrial ecosystem.
Fu believes these long-standing concerns have already prompted China’s policymakers to cultivate some of the world’s most comprehensive industrial supply chains that lie housed within a single nation-state.
“China possesses the world’s most complete industrial system, from raw materials to spare parts, and from equipment manufacturing to end products,” he writes.
“This completeness means that when external supply is cut off, Chinese enterprises can depend upon domestic supply chains to maintain production, ensuring the delivery of orders.”
Fu expects these comprehensive supply chains to provide China with a further strategic advantage during periods of geopolitical uncertainty.
“The Middle Eastern conflict hasn’t just brought a rise in oil prices - it’s also completely roiled global supply chains.
“For manufacturing, the stability of supply chains and reliable delivery have become even more important than prices.
“As global supply chains split asunder due to war, the question arises of who can fill in the gaps, and who can undertake the re-allocation of capital and orders.
“Against this backdrop, China has displayed a unique ‘stabiliser’ role.”
Fu anticipates a possible repeat of a very recent episode in history that played out to the benefit of the Chinese economy - the disruptions to supply chain integrity during the Covid pandemic.
“From 2020 - 2022, when a global health emergency led to strong demand and weak supply overseas, Chinese capacity was able to rapidly compensate for these shortfalls, bringing about large-scale growth in exports,” he writes.
“If the conflict in the Middle East evolves into a long-term issue, then global supply chains will inevitably come under sustained pressure.
“At that time, trade orders can be expected to again accelerate their flows towards China, raising export momentum and injecting new vitality into the national economy.”
Macroeconomic stability and capital market commitment
Safe-harbour investment entails more than just reliable hardware, in the form of secure energy sources and resilient supply chains.
Fu points to the need for trustworthy software, in the form of long-term institutional and policy support, to fully ensure that capital “stays put” in China once it arrives.
While observers have long cited uncertainty surrounding the rule of law and institutional credibility as deterrents for global investors in China, Fu asserts that the situation has reversed in recent years.
He highlights in particular the contribution made by stable macroeconomic policy, as well as Xi’s push to improve China’s environment for capital market investment during this third term in office.
“Compared to other major economies that generally face political uncertainty and policy swings, China displays a high degree of policy continuity and strategic execution,” Fu writes.
He points in particular to the role of the 15th Five Year Plan (2026 - 2030) and the annual convening of the Two Sessions in providing consistency and transparency to China’s macroeconomic policy settings.
Capital markets - a long-time favoured cause for Xi Jinping - have also re-emerged as a top priority in China ever since the 2023 Central Financial Work Conference.
The conference called for “continuing to stabilise and enliven capital markets” via regulatory improvements, as well as a greater push for steady, long-term investment from institutional players and measures to encourage listed companies to fatten dividends.
The Chinese central bank is set to play a key role in fostering capital market development, with officials from the monetary authority recently committing to “firmly upholding the stable operation of financial markets, including stocks, bonds and foreign exchange.”
“At the regulatory level, the continuity of policy signals forms a combined force, providing continued support to the recovery of market expectations,” Fu writes.
“This enables more and more investors to realise that ‘buying China means buying certainty’ and that ‘buying China means buying security.’”
Contingent market winds prove favourable
In addition to the positive impact of long-term policy efforts, Fu also notes the role of provisional market conditions in heightening the lustre of Chinese assets for offshore investors.
Chief amongst them is the fact that the low valuations for Chinese A-shares make them a bargain right now compared to the world’s other major equity markets.
“If we say that energy security is the hard power of Chinese assets emerging as a safe harbour, then the valuation gap is the soft power that is attracting an inrush of global capital,” Fu writes.
As of the end of March, the trailing-twelve-months price-to-earnings ratio of the Shanghai Composite Index was around 17, while for the S&P 500 it had risen to as high as 27.56.
For the KOSPI Composite Index it stood at 22.88, while for the Nikkei 225 Index it hovered at around 20.89.
“Chinese assets are undervalued and global assets are overvalued, forming an extremely vivid reverse contrast,” Fu writes.
“This means that even faced with the same external shocks, the room for the decline of A-shares is limited compared to US shares whose valuations are high, while the room for recovery to the upside is more ample.”
The appeal of Chinese A-shares is further buttressed by their strong presence in sectors currently much coveted by global investors.
These include dividend stocks in strategic sectors such as energy, transportation and banking, as well as globally competitive tech stocks in the AI, semi-conductor and renewable energy sectors.
Fu expects this smorgasbord of options to further enhance the long-term staying power of Chinese assets as safe-haven investments, on top of sound economic fundamentals and accruing institutional certainty.
“The Middle East conflict has not yet subsided, and global capital is still searching for a direction amidst turmoil,” he writes.
“During this process, the role of Chinese assets as a ‘safe haven’ is shifting from a short-term narrative to a long-term rationale.”