weak domestic demand is the main weakness of the Chinese economy in a scenario of war in Iran

The Fitch agency indicated that weak domestic demand continues to be the main risk for the Chinese economy, in a context in which the war in Iran worsens external pressures and increases vulnerability to global shocks.

“The weakness of domestic consumption is the main problem that is affecting the financial health of the Chinese economy as a whole”, says the financial rating agency in a report published on Thursday, warning that the conflict in Iran could act as a “short-term external shock” that amplifies existing weaknesses.

The agency highlights that rising raw material costs and disruptions in supply chains are already affecting the economy, while also raising risks to external demand.

China’s high integration in global trade makes the country particularly sensitive to these dynamics, mainly due to its energy dependence: around 40% to 50% of maritime oil imports pass through the Strait of Hormuz, exposing Beijing to price volatility and logistical delays.

Internally, Fitch highlights that structurally weak demand simultaneously affects companies, families and the public sector, creating a chain effect on economic growth.

“Structurally weak domestic demand is the main point of transversal pressure, because it simultaneously weakens companies’ cash flows, families’ ability to pay and State revenues”, indicates the agency.

The situation is aggravated by deflationary pressures and intense price competition, which compress margins and reduce profits, in a context of excess production capacity.

According to Fitch, this scenario is translating into an increase in difficulties in the job market, with a direct impact on consumption. “The labor market is the main channel through which the lower profitability of companies affects the credit performance of families”, he says.

Although Beijing is betting on the high-tech industry as a driver of growth, the agency warns that this strategy may not generate widespread gains in income or a significant increase in consumption.

Externally, the conflict in the Middle East tends to increase energy costs, but with a limited impact on consumers. “Higher energy costs are more likely to increase producer costs than consumer prices”, points out Fitch.

The agency points out, however, that China has some cushions to absorb shocks, such as strategic oil reserves and foreign exchange reserves, which puts the country in a more favorable position than other Asian countries.