(Yicai) May 8 -- Since the geopolitical conflict in the Middle East broke out, China’s economy has started to feel the impact of rapidly rising energy prices. However, in the long run, China retains sufficient economic resilience and policy flexibility to offset these challenges and keep growth on a stable trajectory.

China’s real gross domestic product expanded 5 percent in the first three months year on year, beating market expectations and matching the full-year growth rate for 2025. But the economy showed a clear split between sectors. Exports were exceptionally strong, soaring 15 percent in US dollar terms compared with a year earlier, and far outperforming other areas. Meanwhile, indicators such as fixed-asset investment, retail sales and real estate remained relatively weak.

However, solid first-quarter growth does not mean that China is immune to the fallout from the Middle East crisis and the sharp increase in global energy prices. Since the conflict began, domestic fuel prices have risen about 20 percent and flight cancellations have increased in recent weeks. In addition, China’s exports to the Middle East plunged 45 percent in March from the year before, dragging down overall export growth by nearly 3 percentage points.

In the short term, continued trade disruptions in the Middle East, weaker import demand from emerging economies vulnerable to energy supply shocks and falling household purchasing power could all weigh on China’s economy over the next few months. We expect annualized quarter-on-quarter real GDP growth to slow from 5.3 percent in the first quarter to 4 percent in the second quarter.

However, the Chinese government still has several advantages and policy tools that it can leverage to ensure that the economic growth rate remains within the target range of 4.5 percent and 5 percent for the rest of the year.

First, soaring energy prices and fuel shortages will prompt more countries to prioritize energy security. That could support Chinese exports, since China dominates several new-energy industries. Between 2019 and 2025, China’s output of electric vehicles, solar cells and power-generation equipment increased by 240 percent, 340 percent and 1,080 percent respectively.

Second, China’s supply chains remain highly resilient, which could help Chinese manufacturers gain market share in industries where overseas production has been disrupted. For example, if aluminum producers in the Middle East suspend operations because of the conflict, the resulting higher prices could boost Chinese aluminum exports in the coming months. Likewise, if petrochemical plants in other countries shut down due to raw material shortages, it could drive up China’s exports of chemical products.

Third, China can ramp up infrastructure investment to offset weaker demand from emerging-market trading partners. New policy financing tools approved during this year’s “Two Sessions,” which are the country’s annual policy setting meetings, capital replenishment of the banking sector and the 109 major projects included in the 15th Five-Year Plan for the country’s social and economic development, which runs from 2026 to 2030, have already laid the groundwork for stronger infrastructure spending this year.

Focus on Stability

During periods of increasing external uncertainties, Chinese policymakers attach great importance to the stability of policies.

Previously, we predicted that China’s central bank would cut interest rates twice this year. But with fuel prices pushing inflation higher, rate cuts now look unlikely. Instead, the central bank will probably continue relying on its wide range of liquidity-management tools, including reverse repos, outright reverse repos and treasury bond trading, to maintain ample liquidity in the banking system.

Fiscal policy is expected to remain on its current path. Unless there is a sharp slowdown in economic growth, it is unlikely that the government will increase fiscal easing beyond what was already announced at the Two Sessions. If necessary, policymakers could hike lending to infrastructure projects or guide state-owned enterprises to speed up investment to support economic growth.

In terms of industrial policy, China will continue to shift the economic focus away from real estate toward high-tech industries. The 15th Five-Year Plan emphasizes deeper integration between science and technological innovation and industrial development, which will further strengthen the country’s manufacturing competitiveness.

Overall, although the recent increase in oil prices has had an impact on trade, technological progress and enhanced industrial competitiveness will support a positive outlook for China’s trade and the Chinese yuan. The redback is clearly on an appreciating trend.

The author, Shan Hui, is chief China economist at US investment bank Goldman Sachs.