China exports slow as Iran war dents demand: will Q1 GDP be impacted?

China’s export momentum lost steam in March, signalling that escalating geopolitical tensions in the Middle East are beginning to weigh on global trade flows and one of Beijing’s key growth engines.

Outbound shipments rose just 2.5% year-on-year in dollar terms, a sharp deceleration from the 22% surge recorded in January and February, according to data released by the customs bureau on Tuesday.

The slowdown coincided with a broader cooling in trade with key partners, including the United States and the Middle East.

At the same time, imports jumped 28% in March, accelerating from a 20% increase in the first two months of the year and marking the fastest pace of growth since 2021.

The surge in inbound shipments narrowed China’s trade surplus to $51 billion, down from $103 billion a year earlier.

Trade pressures mount amid geopolitical tensions

The latest figures highlight how the Iran war is reshaping global trade dynamics.

Chinese exports to the United States fell 26% in March, extending a longer-term contraction in bilateral trade.

Meanwhile, shipments to the Middle East — a region that had been an important source of demand — also declined as conflict disrupted economic activity.

China has increasingly leaned on exports to offset weak domestic demand, particularly as its property sector struggles.

However, the latest data suggest that reliance could become a vulnerability if global demand softens further.

Higher commodity prices linked to supply disruptions in the Middle East are also adding pressure.

While China is relatively insulated from energy shocks compared to some economies, rising input costs could squeeze margins for manufacturers.

Notably, factory prices rose in March for the first time in more than three years, reflecting these cost pressures.

Pinpoint Asset Management’s chief economist, Zhiwei Zhang, said the slowdown had been widely anticipated.

"The market already expected export growth would slow in March," he said, attributing the weakness partly to the later timing of the Lunar New Year and the ongoing Middle East conflict.

He added that China’s trade surplus is likely to shrink this year as higher energy costs cannot be fully passed on to global buyers.

Seasonality versus structural slowdown

Some analysts caution against reading too much into a single month’s data, pointing to seasonal distortions.

Barclays said the March slowdown largely reflected "Lunar New Year seasonality rather than a sharp decline in external demand."

Adjusted for seasonal factors, first-quarter exports remained relatively robust, supported by shipments tied to green technology and artificial intelligence.

Barclays analysts noted that these sectors should continue to underpin economic growth despite geopolitical headwinds.

Others, however, see growing downside risks.

Economists at ING warned that the drop in the trade surplus, combined with rising inflation, could weigh on first-quarter GDP.

They said a "bigger-than-expected slowdown in China's Q1 GDP is also possible," adding that weaker growth could prompt further policy stimulus.

Factors that continue to bolster exports

Despite near-term uncertainty, some economists remain optimistic about China’s export resilience.

Zichun Huang at Capital Economics said the March slowdown was largely due to holiday-related disruptions spilling into the month.

He expects exports to remain supported by strong demand for semiconductors and green technologies.

The competitiveness of Chinese electric vehicles, particularly as higher fuel prices boost their appeal, is also seen as a key tailwind.

In addition, a global shortage of memory chips driven by artificial intelligence demand could push semiconductor prices higher, providing further support to export values.

Still, the broader outlook hinges on the trajectory of geopolitical tensions and global demand.

With China’s domestic economy facing structural challenges, any sustained slowdown in exports could have wider implications for growth.