China's Great Losses in the Israel-Iran Conflict: A Challenge to Xi Jinping's Vision - Analysis

The ongoing conflict in the Middle East between Israel and Iran, far from being a mere distant geopolitical event, represents a source of profound and multifaceted losses for China. These losses directly impact the pillars of its national security, its economic ambitions, and its global geopolitical standing. Xi Jinping's vision of energy security as a fundamental pillar of China's political agenda turns the Middle East into a sensitive nerve for Beijing, amplifying the impact of any destabilization.

China and Iran share an interest in opposing the U.S.-led rules-based international order, but their relationship is largely one of convenience. Just as it leverages Russia's diplomatic isolation to extract favorable terms on energy deals, China opportunistically uses its consumption market to purchase discounted oil from Iran, while going to great lengths to avoid the appearance of sanctionable transactions through smaller purchases and shell companies.

Direct Economic Losses: The Cost of Energy Dependence and Trade Route Disruptions

As the world's largest oil importer, China is suffering direct and substantial losses due to the instability caused by the conflict. Its reliance on energy imports is extremely high, with approximately 16% of its oil in March coming from Iran. Beijing has secured discounted Iranian oil, but this convenience has now become a significant vulnerability. An escalation of the conflict, or a regime change in Iran that leads to a drastic reduction in supplies or a return to U.S. dollar transactions, could cost China billions of dollars annually, estimated between $20 and $30 billion in additional costs to find alternative sources or pay higher prices. This represents a significant drain on resources and a clear national weakness, contrary to Xi Jinping's stated goal of marginalizing energy imports to reduce vulnerabilities. Fundamentally, over 40% of China's energy originates from the Persian Gulf, making any military escalation in the region a direct threat to its energy security and economic stability.

In this context, the management of sanctioned oil trade, though aimed at economic advantage, reveals a further loss for China in terms of control and reputation. In February, it was discovered that private ports in China are receiving oil from U.S.-sanctioned tankers, allowing major Iranian and Russian crude buyers to circumvent restrictions in larger ports. Specifically, Dongying, in eastern Shandong province, has become a key entry point for sanctioned oil after the state-owned Shandong Port Group sold at least one terminal to a private company. The tanker Si He, blacklisted by the U.S. on January 10, discharged over 744,000 barrels of Russian ESPO crude at Dongying last week. Other recently privatized berths, including Yangshan near Shanghai and Huizhou in Guangdong province, have also handled sanctioned oil shipments. Last month, Huizhou's Huaying petrochemical terminal received nearly 1 million barrels of Iranian crude from the Suezmax Nichola, which in turn picked it up from an Iranian tanker, the Salina, according to Bloomberg, citing ship tracking data. This shift to private operators follows Shandong Port Group's recent decision to block sanctioned tankers under U.S. pressure. However, the continued use of blacklisted vessels highlights both the financial pressures on independent Chinese refiners and Beijing's apparent willingness to allow this risky trade to continue, with all the implications of potential secondary sanctions and diplomatic tensions with the United States. This translates into a potential loss of access to international markets and new economic challenges.

China has increased its imports of Iranian oil in recent years by constructing a parallel network of shippers, refineries, and financial institutions to obscure imports and bypass U.S. sanctions. Coupled with its increased purchases of sanctioned Russian oil, China is building what Atlantic Council researchers have dubbed an "axis of evasion" that undermines U.S. sanctions. While this yields near-term profits from discounted energy imports, establishing an alternative trade and payment system could also isolate China from global dollar-denominated systems, posing a strategic risk. According to estimates by the non-profit United Against Nuclear Iran and others who track data on Iranian oil exports, China imported 1.1 million barrels per day (bpd) from Iran in 2023, up 9% from the previous year. If correct, this would mean China is now responsible for purchasing nearly 90% of Iranian crude exports, which would account for almost 10% of total Chinese crude imports, making Iran China's fourth-largest supplier in 2023, just behind Iraq. Chinese customs did not report any oil imports from Iran in 2023, suggesting the oil is imported through transshipment facilities in Malaysia, the UAE, and Oman and relabeled as "Middle Eastern" oil. China is estimated to have imported an average of 1.4 million bpd through the first five months of this year. The sanctioned oil is transported by a so-called "dark fleet" of older tankers that use various tactics to avoid detection, such as turning off signaling systems when making Iranian port calls, sending fake location information ("spoofing"), and conducting ship-to-ship transfers outside authorized transfer zones under the cover of bad weather to hide operations—a practice that heightens the risk of an environmentally costly accident. According to testimony by Erica Downs, senior research scholar at Columbia University's Center on Global Energy Policy, independent refineries known as "teapots" purchased all Iranian crude oil imported into China in 2023. China's large state-owned oil companies have curtailed their involvement in purchasing and processing Iranian oil since late 2019 after the re-imposition of sanctions following the U.S. withdrawal from the Joint Comprehensive Plan of Action.

The Red Sea crisis, triggered by Iran-backed Houthis, has already inflicted tangible damage on the Chinese economy. Although Chinese or Russian-flagged vessels have not been directly targeted, the instability has forced shipping companies to reroute, circumnavigating Africa. This has resulted in a considerable increase in shipping costs and delivery times for Chinese goods destined for Europe and Africa. This global supply chain disruption directly impacts the competitiveness of Chinese exports and domestic price stability. China is suffering a direct economic loss due to a conflict partly fueled by an actor (Iran) with whom it maintains strategic relations.

Challenges to Xi Jinping's Vision: A Failure in Containment and Energy Security?

Xi Jinping's vision of energy security as a fundamental pillar of his political agenda is facing significant challenges due to the conflict. His obsession with energy led to the first national energy law in January of this year, aimed at synchronizing energy policies and reducing vulnerabilities from foreign dependence. However, China's enormous reliance on Middle Eastern energy makes it inherently vulnerable to regional shocks, calling into question Xi's ability to fully guarantee this security.

The current conflict also highlights the limits of Chinese power projection and diplomatic influence. China has actively sought to position itself as a "non-ideological" diplomatic actor and a credible mediator in the region, culminating in the historic mediation between Saudi Arabia and Iran in 2023. The derailment of the Abraham Accords, triggered by Hamas's attacks (an Iranian proxy), was a severe blow to these efforts. For Beijing, it represented a significant loss of prestige and influence. The inability to contain the escalation of the conflict, despite its diplomatic efforts, and the apparent lack of control over its own oil suppliers (the Houthis), undermine China's image as a responsible and peace-building global power, with repercussions for its global credibility. This scenario can be interpreted as a failure in containing regional instability and in fully achieving Xi Jinping's strategic objectives.

Strategic Losses: Threat to BRI, Mediator Role, and Geopolitical Standing

The conflict directly undermines the Belt and Road Initiative (BRI), one of Beijing's key global initiatives. Iran is a fundamental link in the BRI, with a 25-year strategic cooperation agreement between China and Iran, valued at $400 billion, involving extensive Chinese investments in Iran's energy, infrastructure (railways, ports, highways), and defense sectors. China's interest in Iran goes far beyond oil; if sanctions were lifted, Iran's need for significant investments in sectors like railways and ports could greatly benefit Chinese companies. However, prolonged destabilization in the region or a full-scale conflict jeopardizes these colossal investments. Infrastructure disruptions, physical damage, or an insecure environment would prevent project completion and capital recovery, representing a direct financial loss and a strategic failure for a key Chinese foreign policy initiative.

China's interest in Iranian ports, particularly Bandar Abbas and Chabahar, is deeply rooted in its BRI strategy and presents dual-use risks that amplify its losses. Bandar Abbas, a hub for Iran-China trade, is crucial for China's energy security given its reliance on Persian Gulf oil. Incidents like the explosion in April 2025 in Bandar Abbas, even if officially attributed to a chemical accident, highlight the precariousness of this vital infrastructure. It is known that Chinese ships carrying chemicals like sodium perchlorate, a key ingredient for Iranian solid rocket fuel, have arrived in Bandar Abbas. While India is the primary investor in Chabahar, China has expressed growing interest in the Makran coast where Chabahar is located. Chabahar's proximity to China's heavily developed Gwadar port in Pakistan suggests a complementary strategy that could strengthen China's maritime presence in the Indian Ocean and offer alternative routes for its energy imports, potentially bypassing the Strait of Hormuz or the Strait of Malacca.

The dual-use nature of these ports (civilian and military) means they can support military activities, with large storage facilities for weapons and berths capable of accommodating large People's Liberation Army Navy (PLAN) vessels, including aircraft carriers. Although the PLAN officially has only one overseas base (in Djibouti), the idea is that "wherever Chinese interests go, our security boundary must also go." This implies that ports operated by Chinese companies are often designed for dual-use functions, allowing China to build overseas military capabilities more discreetly, but also exposing it to the risks of involvement in regional conflicts.

Complicity and Strategic Damage in Military Relations with Iran

China is emerging as a global competitor in niche sectors of the Middle Eastern arms market and is crucial to the development of the Iranian drone industry. Although the U.S. Department of the Treasury and the Department of Commerce have sanctioned a number of Chinese companies, Chinese actors are fundamental in supplying components that enable Iran to build drones, which it in turn sells to Russia and its Middle Eastern proxies such as the Houthis.

China continues to directly or indirectly provide regional actors with technologies that contravene its voluntary but non-binding commitment to adhere to the Missile Technology Control Regime (MTCR). This includes the occasional and covert role of Chinese state-owned enterprises and non-state actors in supplying Iran's ballistic missile program. The transfer of dual-use technologies and components from China to Iran and its terrorist proxies—including parts used in armed drones and ballistic missiles—undermines U.S. national security interests and stability in the region. In 2023 and 2024, the Treasury Department sanctioned networks of Chinese suppliers and Hong Kong front companies selling components to the Iranian ballistic missile and unmanned aerial vehicle (UAV) programs, including the producers of the Shahed drone used by Russia in Ukraine and in attacks on shipping in the Red Sea. The Department of Commerce’s Bureau of Industry and Security has also placed Chinese and Hong Kong companies on the Entity List in 2023 and 2024 for supplying dual-use components for Iran’s UAV industry. U.S. Assistant Secretary of State for Near Eastern Affairs Barbara Leaf testified in 2022 that Iranian proxies are using Chinese UAVs, and the Chinese government is not attempting to curtail the sales. According to Iranian media reports, China has supplied Iran with access to the BeiDou satellite navigation system, a rival to the U.S. GPS system, which could bolster drone and missile performance and targeting through its advanced navigation and communication system.

Chinese military equipment and components have allegedly been obtained by Hamas and the Houthis, highlighting the potential danger of Chinese products supporting the operations of non-state actors in the region. After October 2023, the Associated Press and the Israel Defense Forces reported that Hamas was using China-origin weapons in Gaza. Although China claims it does not sell weapons to non-state actors, reports indicate Chinese-made weapons may have been sold elsewhere in the Middle East and then smuggled to Hamas terrorists. An investigation by Israeli Defense Forces found that Hamas has obtained advanced weapons and technology made in China, including cartridges and rifle sights for M16 assault rifles, automatic grenade launchers, and communication devices. Chinese components have also appeared in weapons used by Iran and its Houthi proxies in attacks on Saudi Arabia. Drones used in a September 2019 attack on two Saudi Aramco facilities claimed by the Houthis but attributed to Iran by the United States and a UN investigation were later revealed to be Shahed 131 drones, which utilize motors resembling the MDR-208 single rotor UAV engine, made by Beijing MicroPilot UAV Flight Control Systems, a Chinese company. Iran has supplied these and other UAVs and missiles to the Houthis for their attacks on targets across the Middle East. While one Chinese military blogger has speculated that the Houthi rebels were potentially using Chinese missile technology previously shared with Iran, to date there has been no public evidence that the Chinese government is directly transferring weapons to the Houthis. However, there is evidence that weapons used by Houthi rebels contain Chinese-made parts. Furthermore, in June 2024, the Treasury Department announced that Ali Abd-al-Wahhab Muhammad al-Wazir, a China-based Houthi-affiliated individual, played a "key role in procuring materials that enable Houthi forces to manufacture advanced conventional weapons inside Yemen." He utilized1 his China-based company, Guangzhou Tasneem Trading Company Limited (Guangzhou Tasneem), a subsidiary of Hong Kong-based Tasneem Trading Company Limited, to obtain these items and ship them to Yemen. In the broader context of Chinese drone proliferation in the region, in April 2024, Iraq received a delivery of Caihong-5 (CH-5) unmanned aerial vehicles (UAVs), further demonstrating the spread of Chinese military technology in the Middle East.

China has also participated in military exercises with Iran. Most recently, in March 2024, China conducted naval drills with Iran and Russia in the Gulf of Oman. These exercises began in 2018 and are in their sixth iteration, but the 2024 iteration was the first time other countries, including Oman, Pakistan, India, and others, have been allowed to observe. As noted by Mr. Rumley, China’s exercise with Iran and Russia is one example of Beijing focusing on a more symbolic rather than practical operation. During the exercise, the three militaries conducted a hostage rescue drill and tactical maneuvering drills.

Beyond the evident complicity in strengthening Iranian military capabilities and those of its proxies, China would suffer a profound strategic loss from the fall of the Iranian regime. Iran, with its current orientation, represents a privileged interlocutor for Beijing in the Middle East. It is a reliable partner in a context of Western sanctions, offering China access to discounted energy resources and a strategic corridor for the BRI. The fall of the regime would mean the loss of this consolidated partner, potentially replaced by a less predictable government, more aligned with Western interests, or simply by a prolonged period of chaos and instability. This uncertainty would invalidate China's extensive investments and Beijing's ability to maintain strategic leverage against U.S. influence in the region. Without an aligned Iran, China would see its capacity to project power and interests in the heart of the Middle East diminish, making it more vulnerable to external pressures.

The Strategic Dilemma with Saudi Arabia and the Gulf

At the core of China's losses lies the delicate rivalry between Saudi Arabia and Iran. China faces a difficult balancing act: if it were to intervene too decisively in defense of Iran (a move, moreover, militarily difficult to achieve in the short term), it would alienate Saudi Arabia and many other Gulf suppliers. These countries are not only vital for Chinese energy imports but also important trade and investment partners. China risks losing the carefully constructed strategic balance in the region, jeopardizing crucial economic and political relationships. The alleged purchase by Iran of materials for the production of over 800 ballistic missiles from China, which "raised alarms" in the region, is an example of how relations with one partner can inadvertently create diplomatic and trust losses with others.

Critical Risk in the Strait of Hormuz

Finally, China faces the vital necessity of keeping the Strait of Hormuz open, through which a huge portion of Middle Eastern oil transits. This necessity represents a significant structural divergence from Iran's military incentives, which might consider closing the strait as a strategic leverage point in a conflict. For China, a blockade of Hormuz would not only be a catastrophic economic loss but a direct threat to its energy security and the stability of its economy, exposing it to unabsorbable shocks.

Implications of U.S. Sanctions: An Additional Risk for China

Actions by the U.S. Congress and Administration aim to counter the trade in sanctioned oil, creating an additional area of potential loss for China. Since 2021, over 180 entities and individuals have been sanctioned for their involvement in this trade. The supplemental appropriations package enacted in April 2024 includes two key measures: the Stop Harboring Iranian Petroleum (SHIP) Act, which directs the president to sanction foreign persons involved in activity related to Iranian oil (including refiners and port owners/operators), and the Iran-China Energy Sanctions Act of 2023, which expands the definition of "significant financial transactions" in the fiscal year (FY) 2012 National Defense Authorization Act to include those by Chinese financial institutions that involve Iranian oil exports. Such measures increase the risk for China of facing direct sanctions, which would represent a further and severe economic and diplomatic loss, potentially cutting it off from vital segments of the global financial system and international trade.

In summary, China is incurring significant and tangible losses due to the Israel-Iran conflict. These losses extend far beyond mere economic calculation, impacting its energy security, the stability of its global development projects (BRI), its credibility as a mediator, and its ability to maintain a delicate strategic balance in a region of vital importance. The situation exposes the vulnerabilities of a global power that, despite its ambitions, is deeply interconnected with the complex and often unpredictable dynamics of the Middle East, finding itself caught between the anvil of its energy needs and the hammer of international pressure and regional instability.