It isn't any kind of a secret that China has been selling arms to Iran for decades. That's no secret at all. What's really key is whether China has been selling arms to Iran since the end of February when this war between the US and Israel and Iran began. That's the key point and that's where quite a lot of ambiguity lies right at the moment.
Welcome to China Decode. I'm Alice Han and I'm James Kynge. In today's episode of China Decode, we're discussing how China's stepping in as Trump ceasefire wobbles. Plus, Eyck Freymann joins us to discuss China's outreach to Taiwan's opposition, the real risk of a Taiwan conflict, and how the US can actually deter Beijing. 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, oil prices shot back up after negotiations between Iran and America collapsed. The Shanghai A-share index was flat on the day. The Hang Seng H-share index fell about 1%. Alibaba slid 2% and Tencent 3% as investors rushed to safe haven assets. However, EV maker BYD rallied over 5% on new data showing an accelerating interest in Chinese vehicles abroad.
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All right, let's get into it. What was supposed to be a fragile ceasefire is quickly becoming something bigger, a global power play. Chinese President Xi Jinping is stepping into the spotlight, nudging Tehran towards diplomacy while avoiding ownership. Beijing wants the credit, not the responsibility. But the balancing act is getting harder as US intelligence reports suggest that China may be preparing to send air defense systems to Iran.
President of the United States Donald Trump is already firing back, threatening 50% tariffs on Chinese goods, tying Middle East tensions directly to US-China economic stakes ahead of a possible May summit in Beijing. On the ground, escalation is accelerating. On Monday, the US began a blockade of the Strait of Hormuz and after failed talks in Pakistan, Iran is warning that if ports are targeted, no shipping in the region will be safe.
James, since we last spoke, it seems like things have gotten worse. The talks in Pakistan completely failed, which you know isn't a surprise to many experts on this topic. But what is actually interesting to me, linking this back to China, is the fact that China's back in the firing line per Washington's perspective. Not only because of the tariffs that Trump is now threatening, but also potentially because China may be getting more involved militarily.
There's a bigger question about the extent to which China is aiding Iran militarily or has been in recent months. But I think that the linkage of the US-China relationship to the Iran issue has been, I think, the biggest change in the last week. What's your take?
Yeah, absolutely, Alice. I mean, we're recording on Monday mid-morning US time and the blockade that the US was going to impose on the Strait of Hormuz has just started a few minutes ago. No news from that that I've managed to see in the last few minutes. But of course this is a very fast-moving and highly unpredictable situation. But as you say, Alice, I think the key takeaway right now is that China appears to be back in the crosshairs of the US.
Only a week ago, we were talking about China as a potential mediator to the conflict or maybe even a peacemaker. You know, China has this five-point peace plan, but now I think we've flip-flopped and it looks like China could be again a loser from this situation and it looks like, as you say, the military tension between the US and China could grow considerably.
So just quickly on the first point of China being a loser, it's a rather obvious point, but let's state it again. China gets 37.7% of all of the oil exports that transit through the Strait of Hormuz. That's the most that any single country gets. So given that the US has just started a blockade, obviously China has more to lose from this situation in terms of imported oil than any other country.
A quick caveat on that, very necessary caveat, is that although China is the country that loses most in terms of the total volume of oil imports through the Straits of Hormuz, this amount only amounts to about 6% of China's total energy usage. So you know, although China gets hit hard, it is a weatherable storm for China.
I think the area that is most pressing right now is the one that you've already alluded to and that is China and its military relationship with Iran because President Trump said last week that the US would impose tariffs of 50% with no exemptions on imports to the US from any country that supplies Iran with military weapons.
And we're already seeing the US Defense Intelligence Agency saying that the Iran Revolutionary Guard Corps is using technology from a Chinese firm called Mizar Vision that's been feeding AI-enhanced satellite imagery of US operations in Iran to the Iranians. And so, you know, this is kind of a gray area. It's not exactly weaponry, but it does seem to be assistance that China is providing Iran in its conflict with the US. So that's point number one.
Point number two is that CNN had a report last week quoting again US intelligence to say that China's preparing to deliver new air defense systems to Iran within the next few weeks. Of course, this hasn't happened yet. We don't know whether it will happen. But if that was to happen, then it seems very clear that China will be back in the US crosshairs. There could be, you know, a big trade-sanctioned follow-through.
China's foreign ministry spokesman Guo Jiakun has made a statement related to this situation in Beijing. This was at a regular press briefing in Beijing on Monday. He said that China has taken a consistently prudent and responsible approach to arms exports. Obviously he's talking about arms exports to Iran in this case.
It isn't any kind of a secret that China has been selling arms to Iran for decades. That's no secret at all. What's really key is whether China has been selling arms to Iran since the end of February when this war between the US and Israel and Iran began. That's the key point and that's where quite a lot of ambiguity lies right at the moment.
But it does seem like a potentially incendiary situation. I don't know how this is going to pan out. But obviously we're all watching closely. What are you seeing on this front, Alice?
Well, you know what was interesting was that about over a week ago, there was an Atlantic Council piece about this in which they were showing how the Russians and the Chinese had been historically, including most recently, militarily aiding the Iranians through pure military, but also dual-use technology. So the peace sites, what you mentioned, anti-aircraft defense systems, missile fuel precursors, drone components, things that could be classed as dual-use technologies as well.
But you're completely right, James. The real issue is the fact that politically Trump seems to be very worried about this and is going to make a big deal out of it, may potentially even targeting China with these 50% tariffs. And I think this will probably scupper any kind of May visit that Trump may have believed he could have in China in the next month or so because fundamentally I think this sets back some of these trade talks and negotiations.
Because if the Chinese have to convince Trump that they're not doing this in order to avoid tariffs, that's something that I think could really destabilize the relationship. You know, if we look back to even the Russia relationship after Russia-Ukraine, the Chinese have long maintained the view that they are not exporting military technology to the Russians. But there's enough research out there to suggest that there is a fine line when it comes to dual-use technologies.
But we're in a new realm where it's not just dual-use technologies that are increasingly on the list, but also what you just mentioned, James, you know, publicly available AI-generated and enhanced satellite imagery created by a Chinese company that is being used by the Iranians. Now there's a bigger debate about the intentionality, whether or not China intended for the Iranians to use it.
But putting all of that opaqueness aside, what worries me is that now we have, to your point, James, China in the firing line again because Trump sees China as being in the Iran-Russia camp at a time where, you know, we were hoping for continued, dare I say, improved relations that I think has been dealt a major blow in the last 24 to 48 hours.
Yeah, completely. But I also think that given the way this conflict has flip-flopped with regard to China's role in it, it is possible that we might be back with China being a mediator or a peacemaker. Let's not forget that behind the scenes, China's foreign minister Wang Yi worked very hard to try to create a more positive outcome when US Vice President JD Vance met with his Iranian interlocutor in Pakistan last week to try to talk this through.
They spoke for 21 hours. It does seem that there was at least some traction in that and apparently the talks broke down over the question of the Iranian reserves of enriched uranium and they couldn't find any kind of a solution on that front. But I wouldn't be surprised if at some point in the future, China will be back in the frame as a kind of a mediator helping to influence Muslim countries like Pakistan, with which China has very close relations, to try to mediate some kind of a settlement in this.
Well, it's good also, James, I think, to remind people where we're at, you know, six weeks into this conflict. We're close to two months. You know, by conservative estimates, China has, you know, three to four months of strategic reserves. So we're getting to the halfway mark fairly closely, I would say. And I think it is in China's interests for the strait to be opened up as quickly as possible, right? Because if you think about not just the pressure on energy prices,
but also the supply chain for a lot of petrochemicals, things that, you know, polyethylene, these long, you know, names of chemicals derived from hydrocarbons, and fertilizers, the supply chain has really been broken by the blockade in the strait and we're starting to see in some cases massive increases in the prices domestically of helium, of polyethylene that has knock-on effects across the supply chain for Chinese producers and then as a result global ramifications.
So I think that China is under pressure, especially if this conflict escalates and prolongs itself beyond the two-month mark, and that is where I could foresee the Chinese, to your point, James, getting more involved and putting more pressure on the Americans to give concessions in order to reopen that strait.
But just very quickly, the market movements since the start of the war are pretty staggering. Brent oil futures are up 41%. The daily Hormuz ship traffic has decreased by over 90 ships. The price of gasoline in the US is up over 36%. European gas benchmark is up 49%. Gasoline prices in China jumped 11% in March. Global stocks are down 2.3% and the S&P is down about 1%, recovering from losses as steep as 8% in the last few weeks. The dollar spot index is up 1.3%.
This is the market that we're in right now. And I think the roller coaster ride continues. I think we're in for a rough another week or so. But I want to end by saying that China geopolitically may be benefiting from some of these disturbances and disruptions that the US is creating in the Middle East. But domestically and economically, we're starting to see signs that it is suffering from this prolonged blockade of the Strait of Hormuz.
All right, we're going to take a short break. When we come back, we'll get even deeper into how the Iran conflict has heightened US-China tensions as we talk with Eyck Freymann, author of the new book Defending Taiwan. He spoke with us on Friday before news of the US blockade broke. Stay with us.
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Welcome back. Today we're joined by Eyck Freymann. He is a Hoover Fellow at Stanford University and a research fellow at the US Naval War College's China Maritime Studies Institute. He's also written a new book called Defending Taiwan: A Strategy to Prevent War with China. Eyck, thanks so much for joining us today and welcome to China Decode.
Thanks, Alice, for having me.
Eyck, terrific to have you on. Let me just kick off with, I think, what is a timely angle on this story. Eric Chu, the leader of Taiwan's main opposition party, the Kuomintang or the KMT, just met with China's leader, Xi Jinping, on Friday, and therefore he became the first KMT leader to visit the mainland in over a decade. I'm just wondering what you make of this. Is this just a sideshow or is it a sign of some interesting movement perhaps between mainland China and Taiwan?
Well, the first thing to understand is that Eric Chu is a controversial figure within Taiwan and he hasn't fully consolidated his control over his own party. Within the KMT, he's seen as relatively pro-Beijing or at least soft on Beijing. And part of the point of meeting with Xi Jinping is to show, no, I'm the boss. Even he says so. Of course, the price of the meeting was he had to make some comments harshly criticizing the idea of Taiwan independence, essentially blaming the current president, Lai Ching-te, for the tensions.
So I think if I'm Xi Jinping, I see this as a prime opportunity to drive a wedge between the US and Taiwan and to encourage a more friendly KMT going into the 2028 elections.
Right. Well, Eyck, I wanted to take us back into history and for listeners out there, you may or may not know this. Eyck and I were in the same history program at Harvard. So this is definitely something that we were looking into when we were back there in our undergraduate degree. But can you walk us through the 1949 period onwards? Why we're ending up in the situation of two Chinas and frame within that what Xi Jinping's personal goals are when it comes to so-called reunification? How do you think he is thinking about this in historical terms?
In 60 seconds or less. Yes.
I'll do what I can. So look, Taiwan is the unfinished business of China's civil war. The Chinese Communist Party and the Kuomintang, Mao Zedong and Chiang Kai-shek, they fought for control of the mainland. Chiang Kai-shek's forces eventually lost control of northern China and over the course of 1949 they withdrew to Taiwan taking many of the treasures of the imperial palace with them. They had been the ruling government of China preceding 1949.
So they brought with them an unbroken chain of government extending back to the Republic of China constitution which had been signed in Nanjing. And that is the reason why the Kuomintang today claims that it's the unbroken sole legitimate representative of a China that happens to have been divided since 1949.
Now the issue is the KMT ruled as an autocratic regime for several decades but in the '90s Taiwan turned into a democracy and now there's another party that has been in charge for the past decade, the DPP, which has a very different view of history. In their view Taiwan is and always has been an independent country called Taiwan. It just happens for some legacy historical reasons to be called the Republic of China.
So this is the fundamental problem. The question of Taiwan's status is not just about Taiwan. It's about the definition of what China means. Is there such a thing as one China that involves Taiwan? Or is there one China that doesn't include Taiwan? Or is there one China but different interpretations of what that one China means? Much of what Taiwan's domestic politics are about is really this core question.
And from Beijing's point of view, it's willing to negotiate with anyone on Taiwan who acknowledges that there is only one China and Taiwan is part of China. And this is why not just Xi Jinping, but his predecessors have always been open to dialogue with the KMT. But Xi Jinping is particularly interested in meeting KMT figures. He met former Taiwan KMT President Ma Ying-jeou in Singapore in 2015.
And I think if the KMT wins the next presidential election in 2028, he would be very happy to return back to the negotiating table, but with much more leverage than he had last time.
