China And Iran’s Blossoming Relationship

US action against Iran may have had the intention to drive Iran’s international economic activity to a grinding halt but China may well veer that plan off course.

China has broad interests in the Middle East. It’s provided aid to the region, it’s invested in infrastructure projects, has a military base to protect these interests and it imports oil.

It’s partnered with Saudi Arabia, Iraq as well as the UAE. And it has certainly had long-term agreements with Iran. One might assume that China’s relationship with the latter might be under threat with the reissuing of US sanctions but they never stopped China pursuing its interests in the region in the past and they won’t stop it this time.

Politically, China has little to gain from meddling in Middle Eastern affairs. Economically however, it has a lot to gain and has a shared sense of anti-Western imperialism with various Middle Eastern nations at least over the past. The natural alliance between Iraq under Saddam Hussein and Iran is easy to understand.

China however, also has good economic ties with big US allies like Saudi Arabia and in 2017 it signed $65 billion worth of deals.

In terms of oil, China started cutting it’s crude imports from Saudi Arabia because of the rising oil prices in the first half of 2018.

It needs oil, however. Its own domestic production of petroleum is in decline while it is one of the biggest petroleum consumers in the world.

With China and US engaged in a trade war China is looking to Iran for more oil and may even take over the development of more oil fields if French company Total SA pull out. Crude oil imports from the US are also going to lesson and China has said it won’t comply with US demands to stop Iranian oil imports. Not only that, it is also thinking of slapping tariffs on existing imports in retaliation for US President Donald Trump’s own tariffs on $34 billion worth of Chinese goods. And according to reports, he is now planning on backing tariffs on $200 billion worth of Chinese imports.

Things will intensify in November as US sanctions on Iran’s oil and gas sector will start to take place. A few things show that China is preparing to make sure supply is unhindered should this happen. For instance, by switching to Iranian tankers under terms where Iran covers costs, risks and insurance for delivering the oil. This was apparently a tactic Iran used during previous sanctions to circumvent insurance-related barriers to shipments. China would also be subject to secondary sanctions though by virtue of that fact that oil purchases from Iran would run through its central bank.

Oil is not however the only area where China and Iran’s economic relationship is flourishing.

China is Iran’s largest trading partner. In 2017 their bilateral trade volume hit US $37 billion and Iran’s exports to China grew by 25% as compared to the previous year. Major infrastructure projects included the Tehran metro line 1 and its north extension, line 2 and 5 as well as the the Tajrish metro station of line 1. The Tehran-Isfahan high-speed railway is being built by Chinese enterprises and will create more than 100,000 jobs.

Iran could be key in China’s Belt and Road Initiative (BRI) and Chinese finance is also responsible for funding much of Iran’s infrastructure. In July 2017, Sun Ping, vice president of Exim Bank of China (an export-Import bank) said that it had to date granted $8.5 billion worth of loans to fund Iranian projects. China’s CITIC Trust also signed a US$10 billion finance deal in September of the same year to do the same. These deals will also use euros and yuan as a means of avoiding US sanctions.

The relationship may irritate the US and both countries are subject to harsh rebuke. It may however act as useful leverage to try and temper actions from Washington. Considering Trump’s aggressive policy of isolating Iran until it complies with all US conditions in relation to the Joint Comprehensive Plan of Action, however, the risk is a ramped up trade war.

Saudi Arabia’s oil prices are now in decline at both the US’s behest and as a result of increased oil production. Some are calling this out as an Iran Saudi oil price war. China may well become a viable customer again for Saudi oil but there is little motivation for China to get involved in regional rivalry so even if China increases imports from Saudi Arabia again, it won’t halt Iranian imports not least because Iran is clearly an important partner.

Trump’s plan to reduce Iranian oil exports to zero has therefore gotten a very large potential superpower sized spanner lodged within it and a battle of ruthless business is beckoning.

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