Ironically, while the US is locked in a global struggle for influence with China, it is China that was better prepared for the war in Iran — the war the US itself started. China's energy system is more resilient against a prolonged conflict in the Middle East, its businesses are the main beneficiaries of the conflict, and the conflict is improving China's reputation as a more stable international partner for trade and investment than the US.
First, China's economy is more resilient to a prolonged conflict in the Middle East than any other major economy. The main reason is the structure of its energy system. As we wrote several weeks ago, China's vision of energy security — a mix of nuclear and renewables, with coal serving as a bridge — is more resilient than the US system, in which oil and gas account for 72% of total energy supply. China also reportedly holds twice as many emergency oil reserves: 1.13 billion barrels compared to 415 million for the US.
Second, China's businesses are the leading producers of the technologies that benefit most from this conflict. In many countries, yet another international conflict driving up oil and gas prices has sparked renewed demand for renewable energy technologies such as solar panels, heat pumps, and batteries — all industries in which China is the world leader. Electric vehicles, another area of Chinese dominance, are also gaining in popularity as a result.
Third, under the second Trump administration, China is rapidly becoming a more stable and predictable international partner than the US. European leaders were already working to improve relations with Beijing before this conflict began. Global investors, meanwhile, are increasingly viewing Chinese government bonds as a relatively stable safe haven. Notably, Iran is reportedly demanding payment in Chinese renminbi from ships seeking passage through the Strait of Hormuz.
Most importantly, even if the US manages to prevent a full economic collapse in the coming weeks — as we warned last week remains a real risk — the dynamic described above is unlikely to reverse. In all three dimensions, this conflict is likely to remain a positive force for China's long-term development.
The US president just announced a 5-day halt to strikes on Iran’s energy infrastructure. This most likely signals that Washington recognizes what further escalation of this conflict would cost. Everything now depends on the US finding a solution in just a few weeks – one that almost certainly means leaving the Iranian regime intact, despite regime change having been an explicit American objective from the start. It is urgent because the global economic pain is already materializing in at least three distinct but interconnected layers.
1. Energy, inflation and debt
Higher energy prices feed directly into inflation expectations – and therefore into the interest rates set by central banks and demanded by fixed-income investors. Recently, these higher interest rates have already exposed deep liquidity stress in private markets, which threatens to spill over into institutions who hold these assets – like pension funds. This alone could be a sufficient reason for the US to find a way to stop the conflict.
2. The AI boom's hidden supply chain
Less visible but equally significant is the threat to the inputs that power the artificial intelligence boom. Data centers and the computer chips that run them depend not only on cheap energy, but also on a set of industrial chemicals (like helium, sulphur and bromine) that are mainly sourced from the Middle East and are now caught in a disrupted supply chain. Since it was the AI boom that drove the majority of US stock market growth over the past three years, a sustained conflict puts that growth engine under direct threat.
3. The wealth effect and the American economy
The third layer is the large share of US consumer spending – the largest single driver of the US economy – that comes from high-income Americans, whose consumption is tied to the value of their investment portfolios. A sustained stock market decline, amplified by Gulf sovereign wealth funds pulling capital from US markets, could trigger a meaningful pullback in that spending, which could throw the American economy into a vicious downward spiral.
A narrow window for diplomacy
The current situation is straightforward: three simultaneous shocks – to energy prices, to critical technology supply chains, and to the wealth effect underpinning US consumption – arriving together would strain the global economy in ways that no single policy can easily offset. Without a genuine diplomatic breakthrough in the coming weeks, the world could be facing an economic crisis that rivals anything seen in a generation.
If we zoom out beyond the immediate crisis in the Strait of Hormuz, a larger pattern becomes visible that has been building for years: global capital is increasingly looking beyond the United States.
In the past few years, global investors have repeatedly confronted a question that once seemed unthinkable: whether US government bonds still deserve their status as the world's safest asset. It began in 2020–22, when pandemic-era government spending in the US pushed its budget deficit to a record high. The inflation that followed drove up interest rates and pushed down US government bond values – the assets that global investors relied on to protect their portfolios when other markets fall. In 2024–25, President Trump's attacks on central bank independence and his extreme import tariffs reinforced the same dynamic. In 2026, US military escalations against Iran, Venezuela and Greenland have brought some foreign investors to the point of considering shedding US assets altogether.
Two signals have emerged in 2026 that confirm this narrative.
The first comes from the Gulf. Against the background of Iranian officials stating that any institution buying US government bonds is financing the war, Gulf sovereign wealth funds, which hold trillions in US assets, have reportedly been in dialogue about cutting back their investment commitments to the United States, to bring capital back home.
The second comes from Europe. Since the Greenland crisis, more institutional investors are actively choosing European government bonds over American ones. This is not a rotation driven by the expectation of higher returns. It is a repricing of trust: a slow but accelerating loss of confidence in the reliability of the United States that has been building for many years.
As the war in the Middle East continues to push up prices for oil and gas, two countries find themselves relatively well positioned – because they have been preparing for this scenario for decades: France and China. Both have pursued energy security through a mix centered on nuclear power and renewables, reducing their structural dependence on imported oil and gas.
For France, the vision dates to the 1973 oil crisis. Before it, France imported around 75% of its energy and had almost no domestic fossil fuel resources of its own. The response was the Messmer Plan of 1974 – a state-directed mobilization to build out nuclear capacity at a scale that remains unmatched in the Western world. Fifty years later, that bet is paying off.
In China, decades of industrial policy have been shaped by a refusal to become dependent on imported oil and gas – a vulnerability that Chinese planners call the "Malacca Dilemma": the risk that foreign powers could strangle Chinese energy supply by blocking maritime routes (like the Strait of Malacca, or currently, the Strait of Hormuz). Coal, despite its pollution, remains China's dominant energy source today, but explicitly as a bridge, not a destination. The destination is a mix of nuclear and renewables on a scale the world has never seen: more than half of all nuclear reactors currently under construction are in China, and China installs more solar capacity each year than the rest of the world combined.
The irony is that two very different political systems arrived at the same conclusion through the same logic: that the energy mix of nuclear and renewables is not merely relatively good for the environment, but offers energy security for the nation.
Most people expect the war in Iran to end within days or weeks - much like the predictions surrounding Ukraine in February 2022. But a weak regime does not guarantee a short war. It merely means a more unpredictable outcome.
As we wrote in January, the weakening of the Iranian regime has opened a contest for control of the region. Israel, Turkey, Saudi Arabia, the United Arab Emirates, and Qatar are all vying for influence - and none of them want the same outcome in this war. Israel and Turkey were already at odds: former Prime Minister Naftali Bennett publicly framed Turkey as a threat on par with Iran. Now Israel is at odds with the Gulf states, whose entire economic model depends on the war ending immediately.
For decades, the Gulf states built their global standing on a single promise: whatever happens in the Middle East, the Gulf remains stable. That promise has now been broken. Missiles have struck Dubai's airport and hotels and killed civilians in Abu Dhabi. Thousands of travelers are stranded across the region - unable to fly home or forced to pay a massive premium to flee via Riyadh. Within days, the Gulf's reputation as a safe haven is already in serious doubt.
The most common critique of China’s innovation goes like this:
"Sure, China leads in solar panels and batteries – but those were invented elsewhere. And research dominance doesn't mean commercial success.“
It seems like a reasonable critique, but the data doesn't support it.
China now leads the US in open-source AI downloads (17% vs 16% globally). It has 8x more industrial robots installed in factories. And it's running more active clinical trials in biotech than the US.
These aren't legacy industries or lab metrics. They're consumer products, factory floors, and drug pipelines.
The question is not whether China is catching up, but whether the West has a good plan for a world where China is leading.
The second Trump presidency has fueled a widespread belief in Europe that Washington has gone soft on China and Russia. But the data tells a different story. US arms sales to Taiwan have accelerated dramatically from a record $11 billion in 2025 to a rumored $20 billion package for 2026. Meanwhile, US sanctions on Russia's two largest oil companies, Rosneft and Lukoil, triggered in October 2025 a collapse in Russian energy revenue to its lowest point in five years, directly threatening the stability of Moscow's war economy.
After many years of mainly talk, the EU has grown more ambitious in the past two years, and this trend is accelerating in 2026. Last year, Europe's ambition was driven by an 800 billion euro defense investment plan, in addition to Germany rewriting its constitution to enable bigger government investments. But Europe's two most ambitious projects in 2026 are more structural than these spending programs. First, a trade deal with India - now the world's fourth-largest economy but trading little with Europe - that could open a massive market for European industry. Second, the Industrial Accelerator Act, which will introduce "Buy European" legislation directing EU procurement toward EU suppliers. The biggest challenge remains that some member states oppose projects that lower trade barriers (such as France), whereas others oppose projects that raise them (such as the Netherlands). However, given the current momentum in Europe and the highly uncertain geopolitical situation, the probability that both projects advance is significant. If they do, this could contribute to European stock markets' continued outperformance versus the US, as in 2025.
The extreme volatility in metals markets (in recent days, the price of silver has fallen by nearly 30%) reflects a deep structural problem in Western societies. In recent years, investors have increasingly allocated capital to gold and silver as hedges against the inflation of government-issued currencies – commonly referred to as the “debasement trade.” Behind this investment strategy lies the demographic reality of aging populations. Over the past 50 years, governments have steadily redirected spending toward healthcare and pensions for a growing elderly population, crowding out long-term investment and pushing down economic growth. This has led to record levels of government debt and a greater reliance on inflation as the means of reducing the burden of debt over time. This precarious economy of rising prices, particularly in basic needs such as housing and groceries, has produced a fragile political system defined by the rise of populism.
Because all of this is rooted in demographics, it is likely to persist. Recent policy shifts in the United States and Europe signal an attempt to confront this reality by cutting healthcare and pension commitments, but such measures do not address the underlying problem and are likely to intensify political unrest.
The deeper issue is that governments lack a strategy capable of offsetting the reality of aging populations. One possible exception is China. With a limited tax base to finance its own demographic decline, Beijing has been forced into a more radical response: restructuring its economy toward innovation, including in healthcare itself.
At the start of 2026, just as the United States’ confrontation with other countries threatens global stability, its withdrawal from other regions is also fueling conflict, particularly in the Middle East. The region’s dynamics have shifted fundamentally in the past few years: as the United States retreats, the most powerful country in the region, Iran, has been weakened by its war with Israel following the Hamas attack of October 7, 2023. The result is an open contest for control of the region among five countries: Israel, Turkey, Saudi Arabia, the United Arab Emirates, and Qatar. In April 2025, Israel bombed designated sites for three Turkish military bases in Syria, while Saudi Arabia and the United Arab Emirates - until recently longstanding allies - have engaged in proxy conflicts in Yemen, Sudan, Libya, and Somaliland. Looking ahead, it is Saudi Arabia that appears most at risk of triggering a destabilizing scenario, as its future is increasingly threatened by shifting dynamics in the global oil market on which it so heavily depends, driven by rising US production and the prospect of Venezuela, and possibly Iran, regaining access to global oil markets.
