[Market Analysis] The Key Held by the Strait of Hormuz... China's Variable in Breaking Free from Deflation

■ NPC Closing, No Major Surprises… The Key to Escaping Deflation Lies in Hormuz

The National People’s Congress (NPC) concluded on Thursday. The meeting set the lowest economic growth target since 1991, and the market’s expectations for large-scale stimulus measures ultimately were not realized. Statements regarding monetary policy, fiscal policy, and support for the real estate market were largely similar to those from last year.

However, even without large-scale stimulus, the over 40-month-long deflation appears to be showing signs of ending. Thanks to the Lunar New Year consumption season and rising energy costs, consumer prices in February hit their fastest increase in over three years.

Additionally, some analysts point out that the surge in oil prices caused by the Iran conflict may add extra inflationary pressure by increasing costs for fuel, petrochemicals, aluminum, and other energy-intensive materials. UBS strategists suggest that rising input costs could translate into accelerated sales growth and positive profit leverage, providing upward support for stock prices.

■ “Unexpected Safe Haven” During War… Chinese Assets Outperform Globally

Amid the Iran situation causing oil prices to soar and global financial markets to fluctuate, Chinese assets have unexpectedly become a safe haven. After the conflict erupted, Chinese stocks declined less than those in major countries worldwide, the yuan remained strong against the dollar, and government bond yields hardly moved.

Factors supporting China’s relative strength include: reducing dependence on fossil fuel imports through the development of renewable energy and electric vehicles. Additionally, since major oil and natural gas suppliers are state-owned enterprises, authorities can instruct refineries to cancel some fuel exports, which is also a favorable factor.

Global investment banks (IBs) are also rapidly changing their views. JPMorgan’s foreign exchange strategy team recommends clients buy the yuan (against the euro and dollar), and UBS emphasizes the attractiveness of Chinese stocks as a diversification option.

■ Behind the Surge in Exports… Rebalancing and Trade Dispute Risks

China’s export growth also carries new risks. In January and February this year, before the Middle East conflict escalated, exports surged approximately 22% year-over-year. This impressive result was driven by high-base effects from early exports ahead of the 2025 US tariffs.

In terms of energy cost advantages and supply chain stability, China’s export competitiveness is likely to become even more prominent in the future. However, this could also intensify rebalancing efforts and increase the risk of trade disputes with trading partners, making future trends closely watched.