China's export growth slowed sharply in March to just 2.5% year-on-year, significantly below analyst expectations of 8.3% growth according to Reuters polls. This marked the weakest growth in five months, representing a sharp slowdown from the 21.8% growth recorded in the first two months of 2026. The Middle East war continues to cast a shadow over global demand and energy markets, with manufacturers facing rising commodity and energy costs due to supply disruptions from Iran's closure of the Strait of Hormuz, the strategic waterway for the world's 20% of oil and gas flows. Economists had been divided on how Chinese producers fared in the first full month under war shadow, with forecasts ranging from Mizuho Securities' highest projection of 24% rise to Citigroup's conservative 3% growth estimate, while a high base effect also dragged growth after Chinese factories rushed shipments a year earlier to beat US President Donald Trump's April 2 tariff deadline.
Imports posted a strong rebound with 27.8% year-on-year growth, significantly higher than the forecasted 11.2% gain and the 19.8% growth seen in the first two months of 2026. As reported by Reuters, this registered the fastest rise since November 2021, signalling resilient domestic demand despite global uncertainties. However, shipments to the United States, China's largest trading partner, declined 26.5% compared with a year ago, reflecting continued strain from elevated tariffs imposed by US President Donald Trump and ongoing tensions between Washington and Beijing. China's trade surplus came in at $51.13 billion in March, down from $214 billion over January and February.
March marked the first real test of whether enthusiasm for artificial intelligence could offset the gloom unleashed by the global energy shock. China had roared into 2026 with outbound shipments far outstripping forecasts, powered by tech exports, raising the prospect it could smash last year's record $1.2 trillion trade surplus. However, the Iran war casts doubts about that trajectory, with South Korea's exports to China rising 62.4% in March, led by a 151.4% surge in global semiconductor shipments on higher memory prices and robust AI-driven server demand. Even China, long criticised by trading partners for subsidy-backed, cut-price manufacturing, is not insulated from the hit to buyers' purchasing power as fuel and transport costs rise. Still, Chinese producers may yet gain ground as buyers seek cheaper options, said Fred Neumann, HSBC's chief Asia economist, with decades of commodity stockpiling helping blunt the impact of raw-material shocks on factory gate prices.
China's factory-gate inflation turned positive in March for the first time in over three years, with the producer price index rising 0.5% year-on-year, signalling early cost pressures linked to the Iran conflict. Economists warned that inflation driven by higher input costs rather than demand could squeeze company margins, slow growth and limit Beijing's policy options. This represents a significant shift from the deflationary environment that has characterized China's manufacturing sector in recent years, as rising energy costs and supply chain disruptions from the Middle East conflict begin to impact domestic production costs.
In response to US market challenges, China has stepped up exports to other markets including Europe, Southeast Asia and Latin America, according to CNBC reports. Earlier in the year, exports were supported by strong performance in technology-related sectors, particularly semiconductors, driven by the global artificial intelligence boom. March factory activity data out of China showed goods exports continued to support growth, but the war in Iran weighed on sentiment as commodity prices rose sharply, lifting input costs. However, Chinese producers may yet gain ground as buyers seek cheaper options, said Fred Neumann, HSBC's chief Asia economist, with decades of commodity stockpiling helping blunt the impact of raw-material shocks on factory gate prices. Trump is expected to visit China for a meeting with Chinese President Xi Jinping in May, where analysts see scope for deals on farm goods and aircraft parts but little chance of movement on flashpoints like Taiwan.
China releases combined trade data for January and February due to Lunar New Year holiday fluctuations, making March's figures a clearer indicator of current trends. Trade continues to play a crucial role in China's economy, with net exports accounting for roughly a third of the economy last year. For 2026, Beijing has set a growth target of 4.5% to 5%, the lowest since 1991, with analysts expecting exports to remain a key driver as a prolonged slump in the property sector continues to weigh on domestic demand. The slowdown marks an early test of whether AI-led export momentum can counter the global energy shock triggered by tensions around the Strait of Hormuz, which handles a significant share of global oil and gas flows. The latest developments show that while China's export performance remains resilient, the Iran war continues to create additional headwinds through rising input costs and supply chain disruptions.
