China’s factory-gate prices recorded their fastest increase in nearly four years last month, official data released on Wednesday showed, highlighting the impact of rising energy prices following the conflict in Iran on the world’s second-largest economy.

According to figures published by China’s National Bureau of Statistics, the producer price index (PPI) rose 3.9% in May from a year earlier. The increase was the strongest since July 2022 and marked the third consecutive month of expansion.

The index returned to positive territory in March after years of decline. The turnaround came shortly after the outbreak of the US-Israel war in Iran, which sharply reduced oil and gas shipments through the Strait of Hormuz.

Lynn Song, ING’s chief economist for Greater China, noted that prices in the oil and gas extraction sectors rose by 36%.

“The Iran war has clearly accelerated the return to positive PPI inflation that had previously been expected to be more gradual,” Song said.

The United States and Israel launched new attacks on Iran this week, further complicating President Donald Trump’s efforts to extend the ceasefire reached in April and restore energy flows through the strait.

Abhijit Surya, senior APAC economist at Capital Economics, said the May data showed that “the ripple effects of the Middle East supply shock are still being felt,” although he added that consumer price inflation was “showing signs of easing.”

China’s consumer price inflation rose 1.2% year-on-year in May, unchanged from the previous month.

On a monthly basis, however, consumer prices fell 0.1%, underscoring persistent demand pressures in an economy where policymakers continue to grapple with a prolonged property-market slowdown and intense domestic competition.

Beijing remains heavily reliant on trade to support economic growth as it confronts weak consumer and household confidence alongside stagnation in the real estate sector.

Fresh data released on Tuesday showed exports rose 19.4% in May. Shipments to the United States surged compared with the same period last year, shortly after the launch of President Trump’s tariff campaign, which has so far failed to curb China’s export machine.

Song also pointed to a 9.2% increase in raw material prices, saying the figure appeared poised to move into double-digit territory.

“This is likely to feed through to other prices in the coming months because many manufacturers operating with thin margins will have little choice but to pass these costs on to consumers,” he said.

On a monthly basis, producer prices rose 0.5% in May.

China has set an official consumer inflation target of 2% for 2026, while its GDP growth target stands at between 4.5% and 5%.

The Pentagon has designated dozens of Chinese companies, including Alibaba, BYD, Baidu, Unitree, Huawei, and CXMT, as entities with alleged links to the Chinese military.

The move signals an intensifying effort by Washington to broaden the definition of “dual-use technologies” amid heightened national security concerns.

In an updated Section 1260H list released Monday evening, the US Department of Defense (DoD) asserted that these Chinese corporations were found to be supporting the modernization and strengthening of the People’s Liberation Army, despite operating directly or indirectly within the US.

The newly listed entities represent a wide spectrum of technological sectors, including artificial intelligence, semiconductors, autonomous systems, unmanned aerial vehicles, robotics, and battery technology.

A previous version of the list had been briefly published in February before being withdrawn, after it was discovered that memory chip manufacturers ChangXin Memory Technologies (CXMT) and Yangtze Memory Technologies (YMTC) had been mistakenly omitted.

The term “dual-use” refers to technologies that have both civilian and military applications.

While inclusion on the 1260H list does not trigger automatic sanctions, it can result in restrictions on US government procurement, trigger investment reviews, and pose significant reputational or regulatory risks for the affected companies.

Major Chinese firms, including Tencent and CATL, were added to the same 1260H list in January 2025.

Following the latest announcement, American depositary receipts for both Baidu and Alibaba saw slight declines in New York trading, while their shares in Hong Kong remained largely flat on Tuesday.

Winston Ma, an adjunct associate professor at NYU School of Law, told Nikkei Asia that the inclusion of companies like Alibaba, Baidu, BYD, Tencent, and Xiaomi indicates a major expansion of what is considered strategic technology through a national security lens.

Ma noted that the updated Pentagon list aligns with earlier moves by the Committee on Foreign Investment in the United States (CFIUS) to broaden its scope for reviewing commercial mergers and acquisitions.

That expansion, which occurred in early 2025, was aimed at restricting investments from geopolitical rivals, specifically China.

“Both developments reflect a broader reality: the boundary between commercial technology and national security is becoming increasingly blurred,” Ma said.

The updated list was released less than a month after President Donald Trump met with President Xi Jinping in Beijing.

The two leaders secured a fragile ceasefire in the ongoing trade war, leading some analysts to speculate that the administration may have delayed the list’s release until after the summit.

Alibaba and other companies named in the update have pledged to challenge their inclusion.

“There is no basis for concluding that Alibaba should be included on the 1260H List,” an Alibaba spokesperson said. “Alibaba is not a Chinese military company and is not part of any military-civil fusion strategy. We will pursue all legal avenues to contest attempts to mischaracterize our company.”

Baidu also contested its inclusion in a statement to Nikkei Asia. “There is no credible justification for Baidu’s addition to the list. The claim that Baidu is a military company is entirely without merit. We will not hesitate to use all available options to seek the company’s removal from the list,” a Baidu spokesperson stated.

Since Trump returned to power in January 2025, the US has significantly expanded restrictions on Chinese companies through various blacklists and regulatory frameworks, targeting a wider range of sectors even as China’s AI and biotechnology firms continue to advance.

In contrast to the Pentagon’s list, the Bureau of Industry and Security’s (BIS) Entity List carries more immediate consequences by restricting a company’s access to US technology and mandating export licenses.

According to a report by the Center for a New American Security, 95 Chinese entities were added to the Entity List last year, approximately two-thirds of which were linked to China’s military modernization.

Last year, the BIS expanded export controls by introducing the “Affiliated Entities Rule,” which extended licensing restrictions to non-listed foreign affiliates where blacklisted entities hold a 50% or greater stake.

However, the enforcement of that rule is currently suspended.

Beijing said it had conducted law enforcement patrols in waters east of Taiwan in response to a decision by Japan and the Philippines to launch talks on maritime boundary delimitation.

According to a statement from the China Coast Guard, a flotilla led by the vessel Daishan carried out law enforcement patrols “in accordance with the law” on Monday.

China Coast Guard spokesperson Jiang Lue said the operation was “a necessary action” in response to Japan and the Philippines “unilaterally announcing the start of negotiations on maritime delimitation in waters east of China’s Taiwan Island.”

“Such an announcement seriously infringes upon China’s territorial sovereignty and its maritime rights and interests,” Jiang said.

“We urge Japan and the Philippines to immediately cease all illegal actions that violate China’s sovereignty and rights,” he added.

Jiang also said the coast guard would continue strengthening its control and management of the relevant waters and that China would take concrete measures to “resolutely safeguard territorial sovereignty and maritime rights and interests.”

The United States and most of its allies, including Japan and the Philippines, do not recognize Taiwan as an independent state and acknowledge it as part of China. The United Nations has also adopted resolutions reflecting this position. However, Washington continues to provide arms to Taiwan as part of its broader efforts to counter China and encourages its allies to do the same.

Following a summit in Tokyo between Japanese Prime Minister Sanae Takaichi and Philippine President Ferdinand Marcos Jr., the two countries said in a joint statement issued on Thursday that they had agreed to begin “formal negotiations” to delimit their exclusive economic zones (EEZs) and continental shelves.

Beijing condemned the planned talks as “completely illegal and invalid” and swiftly lodged formal diplomatic protests with both Tokyo and Manila.

Chinese Foreign Ministry spokesperson Mao Ning said on Friday: “The so-called delimitation negotiations are entirely illegal, invalid and void. They will have no impact whatsoever on China’s claims or on China’s exercise of its legitimate rights in the area east of Taiwan Island.”

The latest escalation comes at a time when relations between Beijing and both Tokyo and Manila are already strained. Japan and the Philippines are treaty allies of the United States, while China remains engaged in separate territorial disputes with Japan in the East China Sea and with the Philippines in the South China Sea.

As US attention and resources have increasingly shifted toward the war involving Iran, and as the White House has made the Western Hemisphere a strategic priority, Japan and the Philippines have stepped up diplomatic engagement in the region commonly referred to as the Indo-Pacific.

That effort has included building closer security and defence ties with other countries, prompting Beijing to accuse them of encouraging bloc confrontation in the region.

Japan and the Philippines do not share a maritime boundary. However, their seabed claims could overlap because both countries seek to extend their legal continental shelves beyond 200 nautical miles, equivalent to 370 kilometres or 230 miles.

The overlapping area lies east of Taiwan, southwest of Japan’s Ryukyu Islands and north of the Philippines’ Batanes Islands.

Yang Xiao, a researcher at the Chinese Academy of Social Sciences, China’s highest-ranking state-affiliated think tank, said Taiwan’s EEZ and continental shelf are part of the area under discussion.

“These are China’s rights and are not something that the two sides can negotiate among themselves,” Yang said.

In an interview published on Sunday by Yuyuan Tantian, a social media account affiliated with state broadcaster CCTV, before the China Coast Guard announced the patrols, Yang said Beijing would take “historic and unprecedented” countermeasures against Tokyo and Manila.

“Since they are negotiating in a three-party overlapping zone, we can also take further steps to advance our jurisdiction in the waters east of Taiwan,” Yang said.

“If the other side insists on reckless and destructive actions, we will inevitably introduce new countermeasures.”

Yang described the waters east of Taiwan as a vital maritime area for the island’s economic activities.

“If these waters are divided between Japan and the Philippines, that would clearly harm the interests of the people living on Taiwan Island,” he added.