The fact of the matter is China is still very vulnerable, exposed. If this war becomes more prolonged — and it seems as every day that passes, it's more likely that it is a more prolonged conflict.
Right. So, what is your assessment as to why China hasn't really been as aggressive or vicious in its criticism? It's abstained from the UN resolution on the Iran conflict, and it hasn't really, to my knowledge at least, given direct military aid to the Iranians.
Well, Alice, I mean, you know, obviously, first of all, this is a tragedy that is enveloping much of the Middle East now. But at the same time, as you've just pointed out, it provides us with a very valuable chance to get an object lesson in how China conducts its diplomacy and how China's overriding priorities as the world's second most influential geopolitical actor actually play out. I mean, to put it in short, this is China's game theory.
Welcome to China Decode. I'm Alice Han, and I'm James Kynge. In today's episode of China Decode, we're discussing how Beijing is maintaining a neutral position as the Iran conflict deepens, how Chinese automaker BYD is poised to become a global force, and an ambitious and unique infrastructure project is ready to open in Chongqing. We'll talk about how it reflects China's values. That's all coming up. But first, let's do a quick check-in with how the Chinese markets are starting the week. On Monday, the Shanghai A-share index gained 0.2%.
The Hang Seng index fell 0.8%, now down 12% from its January high. On news of Iran striking aluminium plants in the Middle East, aluminium producers Aluminium Corporation of China and China Hongqiao Group closed up 7% and 4% respectively, and EV maker BYD fell nearly 5%. But more on that later. Before we get to the episode, a quick announcement. China Decode now has a weekly newsletter. We go beyond the topics we cover here on the podcast and give you even more data and analysis on the most important stories coming out of China this week. Subscribe at chinadecode.profgmedia.com. It's free for now, so be sure you get subscribed soon. That's chinadecode.profgmedia.com.
All right, let's get into it. It has been just more than 30 days since Israel and the US launched their military operations in Iran, thrusting much of the world into deep uncertainty. China gets about half of its oil through the Strait of Hormuz, but it has not offered public support for Iran, nor offered security guarantees or military backing, in part because of the current tenuous moment in China's trade relationship with the US. Beijing is being highly cautious. Call it a fraud neutrality or call it playing the long game. China is clearly trying to project an image of calm economic stability to a global audience looking on to judge its next moves. James, China I think has been quite withdrawn from the criticism of the conflict relative to, say, Venezuela. We've discussed that previously. But the fact of the matter is China is still very vulnerable, exposed. If this war becomes more prolonged — and it seems as every day that passes, it's more likely that it is a more prolonged conflict, right? So, what is your assessment as to why China hasn't really been as aggressive or vicious in its criticism? It's abstained from the UN resolution on the Iran conflict, and it hasn't really, to my knowledge at least, given direct military aid to the Iranians.
Well, Alice, I mean, you know, obviously, first of all, this is a tragedy that is enveloping much of the Middle East now. But at the same time, as you've just pointed out, it provides us with a very valuable chance to get an object lesson in how China conducts its diplomacy and how China's overriding priorities as the world's second most influential geopolitical actor actually play out. I mean, to put it in short, this is China's game theory. What we're watching now is a real-time example of how China uses game theory to leverage advantage. I've sort of boiled it down to what I consider to be three main areas. And the first one I'm rather fancifully calling, you know, the principle of the tiger's front paw, because a tiger uses its front paw as its prime weapon because it's so powerful. And in China's case, it uses not military or diplomatic muscle as its prime weapon, but economic power.
And so this crisis in the Middle East is one in which China has to back off in terms of military and diplomatic initiatives and concentrate on its economic power. And so in this regard, you've already mentioned China's main priority is to keep the oil flowing through the Strait of Hormuz, and so that it can keep its cities and factories running back home. And it needs to avoid antagonizing the US too much in order to avoid economic reprisals from Washington, such as tariffs or other forms of economic sanction. Second, I think China always tries to keep its powder dry. And in this regard, I'm talking about it strictly prioritizes its crucial theater of focus, crucial theater of interest. Iran and the Strait of Hormuz are of course important to China, but China's crucial focus is on the areas around its borders: Taiwan, the South China Sea, and of course, Japan and Korea. So, China doesn't want to spread itself too thin. It can't focus on everywhere all the time. The official word for this is periphery diplomacy — its focus on the countries and the regions around China. And this has been the case for actually thousands of years. So I think that's the second crucial kind of guiding philosophy that China's diplomacy has.
The last and probably the most important is that China is still a highly transactional power. It doesn't have allies, with the exception of one, and that is North Korea. It has a formal treaty with North Korea signed in 1961. But aside from that, China has no treaty obligation to go in and protect and defend any other country were that country to be attacked. It has many so-called strategic partnerships with countries around the world, and in fact it had one, or it has one still, with Iran, but these mean really next to nothing when push comes to shove. A lot of these strategic partnerships are really just to flatter countries that China wants something from. And in the case of Iran, China wanted cheap oil and it got it. And it also probably wanted to use Iran somewhat to undermine the US on the world stage, certainly in the past. I'm not so sure about the present.
So these considerations, or if we prefer, China's game theory, means that I think China's response in this war has been a mix of the following things, some of which you've already mentioned. It's moderated its criticism of the US. It's been using measured, relatively low-key language to criticize the US. It said that the US attack was unacceptable. It said that Washington is adopting a law of the jungle. It's creating a vicious cycle. But these are fairly mild criticisms really in diplomatic terms. And crucially, at no point has China ever offered military support to Iran, either in terms of money or technology or combat reinforcement. So, China's remained aloof in that really important sense. And lastly, China's going ahead with the delayed summit with President Trump. That is now on again for May. And that's hardly the action of a country that would be really annoyed with the US or wanting to score points against the US or harshly criticize the US.
So I think what we can see through all of these is China focusing on its own interests, mainly economic interests, focusing on keeping its focus and discipline on the countries that surround it, where China's destiny really can be made or lost. And lastly, maintaining a transactional view of its relationship with the rest of the world. In other words, getting what it needs and not pledging too much and not getting bogged down in any kind of military adventures anywhere in the world. Would you agree with that, Alice, or do you have a different take on this?
Well, I like the way that you framed this, James — game theory, you know, to borrow the vernacular of game theory. I think China's dominant strategy, and maybe you and I agree in this respect, is to have the Strait of Hormuz open but on its own terms and ideally through diplomatic means, right? I think the fact that you have a back channel between Washington and Iran via Pakistan is a key indication that China is probably strongly involved. Right? Remember, because Pakistan is effectively a client state of China, heavily funded and military-aided by Beijing. So I could see China playing a big role in if there is some kind of a peace agreement. Now Iran is rejecting Trump's 15-point plan, and there may be escalation in the coming days where Trump is going to put troops on the ground starting in Kish Island to open the strait on American terms. But I think China's strategy, to your point, James, is to disassociate the US-China trade talks and relationship from the Iran issue and then be seen by both the Gulf States but even the G7 countries as being a key diplomatic honest broker, because remember it's not just the relationship with Iran that's at play. It's also the relationship with the Gulf States that have been key suppliers of oil and natural gas to China, and China wants to be on good terms with the Saudi Arabia of the world. So I think that, you know, moving forward we'll have to see how involved Beijing is in the talks.
I take your point, James, that, you know, Iran is not Russia. And I would know the question back to you is: why is it that China has invested so much in the Russia relationship? Xi personally has invested a lot in the relationship with Putin. I don't think that same sentiment is shared with the Iranians, for instance. But I agree with you, James, that Iran is seen as a key strategic partner and foothold for China within the region, and Iran also creates more conflict and difficulties for America in the Middle East. So in this respect it is somewhat like a client state for China. But moving forward we'll have to see, you know, what happens with the new Ayatollah, what kind of a relationship we're going to have between Tehran and Beijing. To date we haven't seen any Chinese direct or indirect financial or military aid to the Iranian regime. I think before the conflict started we had a change — we saw a change in the navigation systems used by the Iranians. They now use the Chinese BeiDou satellite navigation system. There was word on the street that the Americans, you know, before they started striking, were trying to take down some of the system and infiltrate it in order to pick up on where different assets were in the region. And then before that there was talk about China selling precision missile technology to the Iranians. We'll have to see moving forward if China is willing to do that, but thus far I think they've been reluctant to.
And then one last point that I will make is that even although I think China benefits from this geopolitical game theory, multiplayer game theory, I think we still shouldn't understate the difficulties this puts China in in terms of the energy, fertilizers side of things, right? Because, you know, you effectively have about 100 days of strategic reserves. China is now cutting down pretty much on all exports of oil and fertilizers, and I think potentially even petrochemicals. And right now they're putting in oil caps to protect everyday consumers and corporates. You know, if this conflict drags on for longer and the strait in particular is not securitized for, you know, more than two months moving forward, I think that puts China in a difficult position, has ramifications for the economy where again growth is quite fragile. But I want to end on one last question for you, James. I think this sort of sums up my thinking: why is it that this relationship with Iran is so different from the relationship with Russia? On the surface these are both huge oil-producing countries, they're all part of the axis of ill will, they all cause troubles for the West. Why is it that I think China is more hitched to Russia and has supported Russia throughout the conflict much more than Iran?
Absolutely, Alice. And before I answer that, let me just say that I think you're dead right to point out that there could be things happening behind the scenes that we don't know about. You mentioned missile technology. We don't have any evidence that China is helping Iran in any regard like that at the moment. But if that was to happen, then I think we would be in different territory here. For the moment, we assume it's not happening. But anyway, Russia versus Iran. I think this very much falls into the kind of category that I mentioned in terms of periphery diplomacy, which is obviously China's core criteria. Russia and China have a border of several thousand miles. So that makes Russia much more important to China than Iran. China also gets a huge amount of liquefied natural gas from Russia through pipelines, which are actual fixed infrastructure. So that's another reason why Russia is so important. But also, Russia provides China's access to crucial other supply lines such as the Arctic. You know, shipping through the Arctic goes ahead in the summer months, and it's possible that in the future it could also do so in some of the winter months if global warming continues.
I do also think, and this slightly goes against the argument that I was trying to make, that Xi and President Putin have a bit of a personal relationship. I said that I thought China was mainly transactional and it focuses on its periphery diplomacy. And you can see that Russia falls into those categories. Russia's vital for China's supply lines, vital for China's LNG supplies, but there is a little bit of an emotional content, I think, between Putin and Xi. So, you know, perhaps that goes against my sort of framing argument of what I think motivates Chinese diplomacy. Chinese game theory in this regard actually is rather similar to something that goes right back into China's ancient history. There are principles of diplomacy set out in Chinese canons from about 2,500 years ago. They're called the 36 Stratagems, and they're all about how one state can use psychological warfare, ruses, deception to gain the advantage over your rivals. And I was looking through this list of these 36 Stratagems. I would definitely recommend this to any listeners that don't know about these. You can find them anywhere on the internet. And they are really colorful and really interesting. And one of the key aspects of these stratagems is that fighting is always considered a last resort. And I think that underlines what I was saying about economic development being so crucial to China's sense of statecraft.
And if we apply some of the stratagems to what's happening now between China, Iran and the US, I think there's a couple of stratagems that actually could do some work to help us understand what's happening. One of them is called 'kill with a borrowed knife' — Jie Dao Sha Ren in Chinese. I'm not saying that China is using Iran to kill the US, but I certainly think that it is disadvantaging the US by its tight relationship with Iran. And the other stratagem that jumped out at me was one which means 'sacrifice the plum tree to preserve the peach tree.' And this is basically a sense of sacrificing short-term objectives in order to gain the long-term goal. In other words, keep your eye on the prize. And in this regard, I would say that China is sacrificing the short-term objective of being highly critical of the US, which is what China really believes in its heart, in order to gain the longer-term objective of getting Trump to come to Beijing and hopefully, in China's eyes, to win some concessions from Trump, maybe some de-escalation in the trade war between China and the US.
Yeah, I think I agree with that. It's funny that you quote Chinese history. I would have said that one of the analogies that we're looking into is the Suez crisis in '57, in which the Brits and the French were involved in trying to stop Nasser from nationalizing the canal and controlling it. And the US under Eisenhower came in after diplomacy failed and basically economically coerced the Brits and the French to back down, thus paving the way for America overtaking the British Empire. And so the big question as we look forward is: is Iran the Suez crisis of today, and does that mean that China is ascendant and the US is in decline? So I'll leave that big epic thought for a future episode, but I think it's something worth bearing in mind. Okay, we'll be back with more after a quick break. Stay with us.
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Welcome back. BYD, the largest of Beijing's auto giants, is making serious moves. It recently signaled to analysts that it is on pace to beat its 2026 exports target by 15%. Earlier this year, the company reported a 7.7% increase in global sales, even as domestic sales declined by almost 8% in 2025. But competition from other Chinese manufacturers, along with weakened demand at home, has made them less of a behemoth domestically. BYD's net earnings declined by 19% to 4.7 billion US last year, the first profit decline since 2021. But abroad BYD is ascendant, and this comes at a time when Tesla's market dominance continues to decline in the US. Tesla is investing heavily in artificial intelligence and robo-taxis, while BYD is pushing ultra-fast charging technology in batteries and overseas expansion. James, I think this story is timely and it somewhat links to the Iran crisis issue, right? Because if we see oil prices continue to rise in the US, for instance, I'm hearing they're up a dollar a gallon at the pump for consumers, this may incentivize a lot of consumers across the world to go, 'maybe I'll buy an EV instead.' And actually, these Chinese EVs are very, very competitive and energy-efficient, right? So, I think maybe one of the winners beyond China geopolitically is Chinese EVs. What's your take on that?
100% agree, Alice. I think that, you know, the BYD phenomenon is a true phenomenon. I mean, the growth of BYD sales outside China has just been so rapid, but I really do think that its impact is only going to grow, and it's gathering a following wind from the crisis as you described in Iran and obviously the rising cost of petrol, gasoline around the world. But I think the bigger point here is that BYD is just the first of many, or one of the first of many. A wave of Chinese companies are finding it easier to make money abroad than back in the hyper-competitive Chinese domestic market. And this is why Chinese exports this year are likely to rise, in my view, above 4 trillion US. That's up from about 3.8 trillion last year. And that will be the biggest proportion of total world exports ever in history, according to my research. So I think, you know, this BYD phenomenon is connected to a much bigger phenomenon which is truly epochal in terms of global history.
When it comes to BYD itself, I think the salient characteristics are the ones that you've described. Its technology is world-class, but it comes in at a price point that really blows Western car companies out of the water. I drove a BYD EV in Germany a couple of years ago. It seemed to me like an excellent car. The biggest problem I had was understanding the instructions, because of course the car speaks to you, but I don't speak any German and this was all in German. So, that was a bit of an issue. But the one I rode was the BYD Atto 2 that costs about 22,990 euro, which is a lot less than, you know, the Teslas and some of the other EVs on sale in Europe. And as you've already mentioned, Alice, the key aspect now and the new news here is the charging technology, because BYD this month has just unveiled something called the Blade Battery 2.0. This is a game-changer, complete game-changer. This means that you can charge from 10% of the charge to 70% of the battery charge in just five minutes. It just takes five minutes. That's equivalent, I think, to about the same amount of time that somebody spends at the pump putting gas into their car. So, that is a complete game-changer. I remember that BYD car that we drove in Germany, we had to spend about 35 minutes trying to charge it. All the time we were fretting about whether or not we were going to miss our plane. So I really do think that what we're seeing now in terms of BYD's penetration into global markets is just the beginning.
Just a couple of numbers to put a little bit of flesh on the bones. BYD's registrations in Germany have jumped 10 times in January 2026 compared to a year ago. And BYD now ranks sixth globally in terms of total auto sales. So that's EVs and non-EVs. And that puts it ahead of Ford for the first time ever. And we don't have to remind any of our listeners that Ford's been around for more than 100 years. So this is a true phenomenon that we're trying to describe here. Do you like BYD or Teslas, or, you know, have you driven any of these cars?
I've actually driven both a Tesla and a BYD. You know, they're both great cars, but I think, at least from a standpoint of, you know, being a passenger, I think BYD was a better experience. They just have thought of a lot of the, you know, internals, the look of the car, and it feels very good. Even the operating systems within the car dashboard are pretty intuitive. I've actually been very, very impressed, and for that price point, I just think that it's a no-brainer for a lot of people. If they're just purely thinking about, you know, cost per use as well as energy efficiency, BYD is a no-brainer. But when you were talking, James, I was thinking that it actually is really significant that a company like BYD in February of this year finally saw its overseas sales, its exports, exceed its domestic sales. That is, I think, a very critical turning point for a Chinese automaker. We're at a point now where it can export more to the rest of the world than it can, you know, be consumed domestically. So just for the numbers, around 100,000 units were sold abroad in February versus about 90,000 sold in China, and overseas sales in January to February jumped 50% year-on-year.
That suggests to me that there is going to be legs in terms of an external overseas market for BYD. And remember they're, you know, building plants all over the place, you know, in Hungary and Latin America and Southeast Asia to obviously avoid some of these tariff concerns but also some of these, you know, industrial policies in countries that they're selling into. If they can build local manufacturing, that helps, I think, reduce some of the trade backlash against a Chinese EV maker like BYD. But your point, James, about the batteries — that's going to be crucial. You know, a company like BYD where everything's done in-house, it has a fully closed supply chain, will continue to carry the cost advantage in a time where we could see gas prices being at sustained highs, right? You know, WTI might be north of 100 for at least the foreseeable next couple of months. And then the last thing that I will say that I think is super interesting is the domestic environment, right? So the stocks have, I think, seen some dampening — BYD stocks and EV maker stocks — early this year because of the cost pressures, the price wars that are still happening domestically. And, you know, my takeaway from the government work report in the five-year plan is that the government still cares about this anti-involution drive, you know, the so-called drive to stop these aggressive price wars and deflationary prices in the economy and in sectors. So potentially maybe that will reduce some of the cost pressures and profit pressures for BYD this year. But by far the most important point is the point that you're making, James, is that they are, you know, really enjoying positive tailwinds in terms of overseas market demand for the cars.
Yeah, I'm in Hong Kong at the moment, Alice. And I just had a BYD experience today, actually. Well, not really a BYD, but certainly a Chinese EV experience. I was talking to somebody at an event that I was at here, and they said to me, 'So, I'm assuming that you drive an EV?' And actually I don't. Back in the UK, I drive an internal combustion engine car, like an old-style car. And they looked almost offended, you know, that I would have the temerity to be using a gas guzzler at a time like this when oil prices are rising so much and the environment is such a big topic. So, I also think that peer pressure is going to have an increasing influence on this topic as well. BYD has comprehensively overtaken Tesla now in terms of vehicles sold around the world. In 2025 it sold 4.26 million vehicles against Tesla's 1.64 million. So yeah, BYD is really streaking out ahead now when it comes to EVs globally.
