The War, the Chinese Economy, and the Central Bank of the Republic of Türkiye’s Decision

There is a major aspect of the war that has been ongoing for a week—one that has received almost no attention: its impact on the Chinese economy…

Since the beginning of the Russia-Ukraine War, the behind-the-scenes U.S.-China conflict has continued, and alongside it, the U.S.-shadowed tension between China and Taiwan. Following the Tariff Wars, the Iran-Israel conflict has now also entered the equation.

Unlike its energy-rich rival, the United States, China is almost entirely dependent on imports. In 2024, China imported 11.3 million barrels of oil. Its production-driven economy relies heavily on these imports. The bill for this energy consumption totals a staggering 310 billion dollars. A significant portion of this massive demand is met by Saudi Arabia, Iraq, and Iran.

According to official data from Iran for the year 2023, 41 million barrels of oil were sold to China, accounting for 3.7% of China’s energy imports. However, experts argue that these figures do not reflect reality. Due to sanctions imposed on Iran, a significant volume of oil is being routed to China through intermediary countries such as Singapore, Malaysia, and Oman. It is estimated that the true share of Iranian oil reaching China is around 7–8%.

There is, of course, also the pricing aspect. For Iran, which has a GDP of 400–500 billion dollars, oil and gas sales are of vital importance. Due to sanctions, the oil sold through such alternative channels is subject to substantial price discounts. As a result, China is benefiting greatly from this situation.

When we look through this lens at the Strait of Hormuz and the Strait of Malacca, the significance of the matter for China becomes even clearer.

For many years, the United States, alongside its allies and through its naval forces, has been exerting significant pressure on China by tightening control over the Strait of Malacca—China’s gateway to the world in terms of energy. So much so that China has been trying to overcome this security issue and at the same time develop and secure its trade routes through the Belt and Road Initiative, a project familiar to all of us and one I have frequently referenced in my writings. Over 400 billion dollars has been spent on the project so far. Not only has the project failed to reach the desired level, but China has also entered a difficult period marked by serious economic challenges.

On top of all this, there is now the looming possibility that the Strait of Hormuz could be closed at any moment. If this strait—considered the main valve for global LNG and oil flows—were to be shut down, it could lead to severe volatility in energy prices, with oil prices potentially surging past $100 very quickly.

Approximately 20 million barrels of crude oil and petroleum products, which accounts for about one-fifth of average global daily consumption, pass through this strait.

And it’s not just China. The entire Asian region would be thrown into disarray, triggering a domino effect of energy shock. Together with China, countries like India, Japan, and South Korea purchase 69% of the crude oil and condensate and 83% of the LNG that passes through the Strait. Refinery shutdowns, power outages, and import-driven inflation would rapidly escalate the risk of instability across Asia.

Given the scope of this article, I will not delve too deeply into what might unfold in the West. However, they too will be severely affected. Even if, for a brief period, the initiative shifts to the United States—a country rich in energy reserves—the broader consequences will still manifest in line with the global factors that led Powell to dismiss expectations of a Fed rate cut.

Indeed, it is now certain that the already challenging situation for China will become even more difficult due to the Iran-Israel war. While we watch and wait with bated breath to see where events will lead, there is yet another important issue: the Central Bank of the Republic of Türkiye’s (CBRT) interest rate decision…

Amid the sharp decline in oil prices, inflation expectations had started to brighten with the May data—until the war broke out, causing oil prices to jump by $10 in a short time. Under these conditions, and given our heavy dependence on energy imports, I expect the CBRT to keep interest rates unchanged.

In fact, for the past four days, the weekly repo mechanism has been activated instead of the overnight one, bringing the rate down from 49% to 46%, which represents the actual policy rate. While I do not expect a rate cut, many sectors—especially industrialists—are already raising flags in anticipation.

Although my expectation is for the rate to be held steady, I wouldn’t be surprised by a 100 basis-point cut…