SUMMARY
- 22V’s China Economic Sentiment Series (CHESS) tool shows that domestic analysts expect China’s economy to remain resilient in the face of the Iran crisis; that said, expectations for exports and broader growth have lost momentum since January.
- While the energy price shock is leading to increased expectations of reflation in China, it is a double-edged sword: sentiment towards the equity market has declined, as analysts see near-term risks of reduced monetary policy easing globally as well as in China.
- Household demand is a mixed picture: there has been a modest pickup in analyst sentiment towards the property sector, but consumption expectations have dipped.
- Our Take: Downside risks for China’s economy are limited, but fading fiscal stimulus means that the macro backdrop will remain subdued even if the conflict ends soon.
This report updates the sentiment signals from our proprietary China Economic Sentiment Series (CHESS) tool, which we relaunched in February (link HERE). CHESS uses LLMs to assess the sentiment of Chinese economists and analysts commenting through opinion pieces and brokerage reports.
This update focuses on how the Iran conflict is impacting sentiment among influential economists commenting in public opinion pieces. The overall picture is one of economic resilience: As the below heatmap shows, sentiment has been quite steady since the Iran crisis erupted on February 28. This should not be a surprise: we have also argued that China is comparatively well-placed to weather the energy price shock (link HERE) given high inventories of crude, a diversified energy mix (due in particular to coal and renewables), and a macro environment of deflation and industrial excess capacity.
However, China’s economy and markets are not immune to the global ripple effects of the crisis, which is dragging on sentiment towards Chinese equities, monetary policy expectations, and exports. Key charts and takeaways further below.
Slowing momentum for exports and broader growth
China’s export performance has been very strong in recent months, including 21.8% y/y growth in January-February. However, sentiment towards the export outlook has been fading since late January, indicating that even before the onset of the Iran crisis, economists had expected momentum to slow. Export sentiment has slipped further since the conflict erupted; emerging economies, a relative bright spot for China’s exports in the last year, will likely be hit particularly hard.
Given that exports have been a key source of support for China’s growth amid weak domestic demand, it is not a surprise that sentiment towards the macro outlook (blue line) has also dipped. Sentiment towards the near-term growth outlook now stands at neutral.
Reflation comes with risks for equities
One potential upside of the energy price shock is the potential for it to lessen China’s deflationary pressures. Analyst expectations for escaping deflation (orange line) have improved since the launch of the “anti-involution” campaign in mid-2025 and taken another sharp turn up since the start of the conflict.
Analyst sentiment towards the equity market outlook (blue line) had largely tracked deflation until recently, on the assumption that the end of deflation would boost corporate earnings growth. The energy shock has scrambled that logic, with analyst reports citing the potential for tightened monetary policies and risk aversion (globally as well as China) as near-term headwinds.
Mixed expectations for the household sector
What are the prospects for China’s domestic demand to offset potential weakness from exports? The positive news is that sentiment towards the property sector (blue line) has ticked up in recent months and is at its most positive level since the summer. However, there are two caveats. First, our in-house view is that property prices and activity show few signs of bottoming out any time soon; this improvement in sentiment could be short-lived, as has been the case for other episodes over the last several years.
Second, analyst expectations for consumption (orange line) have fallen since early March. This likely reflects the lack of major consumption-focused stimulus announced during the National People’s Congress (March 5), as well as concerns that the Iran conflict and its impact on energy prices could weigh on household economic confidence.
Bottom-line
Our in-house view of China’s outlook is not radically different from those of CHESS. Downside risks to China’s growth are modest unless the Iran conflict should dramatically worsen or last into the summer. Even apart from the Iran conflict, however, we continue to expect growth to slow sequentially in Q2 due to fading fiscal stimulus (see our latest take HERE). A short-lived crisis should lift some of the inflation-related concerns dragging on Chinese equities, but we expect the overall macro backdrop to remain subdued.
