Why China is still dealing with Iran?

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China and Iran first established diplomatic ties in 1971 and Beijing during that time had strong relations with Shah of Iran. The relationship continued and expanded even further after the Islamic revolution in 1979 and still till today strong and robust. From the Chinese perspective, Iran is a major power in the Middle East, with a population of nearly 78 million; it is the most populous country in the region. Moreover, Iran has the second largest territory in the region. Additionally, Tehran’s military capabilities exceed those of other countries in the region. As a Middle Eastern power, Iran, in the Chinese calculus could play a key role in helping China to expand its influence in Gulf and beyond.

Strategic calculations

China’s oil security strategy seeks to maintain stable oil’s supplies of reasonable price and from diverse resources. In Beijing’s view, Iran could play a dual role in strengthening the security of China’s oil supply. First, Iran has the natural capacity to be one of China’s key oil suppliers. Second, Iran could provide China with a westward source of oil, which avoids the Strait of Hormuz. Iran is strategically located between the Caspian Sea and the Gulf. It has the world’s second largest reserves of natural gas and the fourth-largest reserves of oil.

However, Michael Singh the managing director of the Washington Institute for Near East Policy argued lately in the “Foreign Policy” that Beijing is using the Islamic Republic to foil American interests in the Middle East. He added, “It’s time we wised up to this dangerous game. From Beijing’s perspective, Iran serves as an important strategic partner and point of leverage against the United States.”

Indeed, the United States may see China as a key partner in isolating Iran, but China sees Iran as a potential partner in countering U.S. power in Middle East. Zhang Xiaodong, a professor of Middle Eastern studies at the Chinese Academy of Social Sciences Beijing once said that “China could use its support for Iran as a bargaining chip to influence American support for Taiwan's independence.” Or as a recent RAND study put it bluntly “isolated Iran locked in conflict with the United States provides China with a unique opportunity to expand its influence in the Middle East and could pin down the U.S. military in the Gulf so that it is harder to pivot toward the Pacific.”

Iran economic importance

Iran also economically important as it is strategically important. Today, the Sino-Iranian economic relationship is highly robust, during the course of the past two decades; the Sino-Iranian economic relationship has experienced rapid expansion. According the IMF data, between 1990 and 2012, bilateral trade grew from US$ 335 million to round US$ 37 billion (the figure may be even higher if the Chinese products shipped from the UAE to Iran could be included), with China representing Iran’s top oil import partner, largest export partner, and largest trade partner overall. Additionally, Chinese Ambassador to Tehran Yu Hongyang recently told Islamic Republic News Agency (IRNA) that currently 70 Chinese companies are active in Iran.

Iran’s economic reliance on China is not limited to the energy sector. In fact, non-energy trade and investments form a substantial component of bilateral economic ties. The latest (January 2013) Heritage Foundation’s “China Global Investment Tracker” between 2005 and end-20012 Iran was the sixth-largest recipient (the largest in the Middle East) of Chinese non-bond investment $bn16.8, trailing only the U.S., Australia, Canada, Brazil, and Indonesia. Furthermore, the RAND study noted that in the past two decades, Chinese engineers have built bridges, dams, railroads, and tunnels throughout Iran. The Tehran metro system completed in sections between 2000 and 2006 and is also developing Iran’s rail network, helping it become more integrated into regional markets.

However, the Sino-Iranian economic relationship is centered on the energy sector. Iran holds the world’s fourth largest source of proven oil reserves and second largest source of proven gas reserves, according to BP statistical review of world energy 2012. In recently published memoirs of China’s long-time ambassador to Tehran and currently distinguished Research Fellow at China Institute of International Studies (CIIS), Hua Liming, admitted that his diplomacy in Iran after China became an oil importer in the early 1990s had been entirely dictated by energy politics. Iran was China’s fourth-largest oil supplier in 2012, when it shipped about 441,000 barrels a day. China also is the top destination of Iran’s oil. In addition to purchasing Iranian oil and natural gas, China is also the most important foreign player in Iranian energy sector.

China primary principles

Yet, economics is not the only reason; China is guided in its foreign relations by two primary principles, both of which reflect domestic priorities. First, China wants to encourage a stable international environment in which it can best pursue domestic development without conflict or other limiting factors. Secondly, according to Charles Freeman from Center for Strategic and International Studies, China is extremely sensitive to international policies that ‘interfere’ in sovereign decisions, because of sensitivities to perceived international interference in Taiwan, Tibet, and Xinjiang. China would, even without its increasing economic interests in Iran, be less inclined to impose sanctions. As Li Weijian, director of the Research Center of West Asian and African Studies at the Shanghai Institutes for International Studies puts it: “China’s stance on the Iranian nuclear issue is not subject to Beijing’s demand for Iranian oil imports, but based on judgment of the whole picture.”

Furthermore, the fact that China is willing to expand its economic relations with the countries of the Gulf Cooperation Council (GCC), but it would prefer to diversify its oil imports and do not want to rely entirely on the Arab oil imports. From the point of view of China’s good relations with Iran also ensures the protection of Beijing’s interests in Iraq which is growing rapidly. In this regard Weijian argues that the U.S. tactic to “bribe and threaten” China through its oil trade with Middle East producers will not work. He said: “China has established an oil supply network based on various importers. Iran and Saudi Arabia are part of the multiple sources.”

Beijing Balancing Act

Against this strategic background, the well known economist Ben Simpfendorfer and the author of “The New Silk Road: How a Rising Arab World is Turning Away from the West and Rediscovering China” noted that a nuclear Iran and regional arms race would be bad for business. He argues that even Chinese academics have signalled that Iran’s unpredictable behaviour is challenging China’s relations with its other regional partners, especially Saudi Arabia. While China may not agree to sanctions easily, its support for Iran is often overstated.

China has stood firm in the U.N. Security Council against further sanctions against Iran, but it is also well aware of the importance of its economic and political relations with the GCC countries, Saudi Arabia in particular. Indeed, the economic relation between China and the Gulf Cooperation Council (GCC) is more important than Iran. The total trade between China and the GCC is more than 4 times the Sino-Iranian trade, as the bilateral trade reached between China and GCC more than $ 155 billion (about $ 74 bn with Saudi Arabia alone) in 2012, versus nearly $ 37 billion with Iran. Furthermore, the GCC countries provided China in the same year with more than third of its oil imports (almost 20 percent from Beijing’s top supplier Saudi Arabia), versus less than 9 percent from Iran, according to latest UN Comtrade data.

While China has long held that Iran must adhere to the international nuclear non-proliferation scheme and not pursue nuclear weapons, it has also resisted attempts by the United States to gather international consensus to punish Iran by ‘crippling’ sanctions. However, China’s energy ties with Iran also are constrained and conditioned by Sino-U.S. cooperation and competition and by the Middle Eastern power structure, particularly the dispute over Iran’s nuclear programme. Geoffrey Kemp, Director of the Regional Security Program at the Center for the National Interest, in his excellent book “The East moves West: India, China, and Asia’s growing presence in the Middle East” mentioned an important point that China has been careful not to overplay its hand in challenging the United States on the key issues that plague U.S.-Iran relation. In this regard, a report published last December by US-China Economic and Security Review Commission (USCC), titled, “China-Iran: A Limited Partnership,” stated that China “ties with Washington are no doubt far more critical to Chinese national interests than Chinese-Iran relations. China has to take into account Saudi Arabia’s staunch opposition to Iran’s nuclear program.”

Indeed, China continued its balancing act to significantly reduce its purchases of Iranian oil. According to figures from China’s General Administration of Customs, China’s imports declined in 2012 by almost 21% to 441,000 per day (b/d) compared to 557,000 b/d in 2011. As a result, for the whole of 2012 Iran lost its position as China’s third largest supplier after Saudi Arabia and Angola, due to a 31% rise in imports from Russia. The annual decrease in imports was within expectations and safely in the range of 20 percent to 30 percent in crude cuts required by the U.S. Subsequently, the volume of bilateral trade between China and Iran went down to $ 36.5 bn in 2012 from $ 45.1 in 2011, according to latest UN Comtrade figures. Above all, unlike with most GCC economies, the craft, small and medium industries play an important role in the Iranian economy, but the flow of cheap Chinese goods and in some cases low-quality generated a popular resentment against China and a backlash from merchants and factories that are exposed to significant competition from Chinese goods.

The future relations

However, a new test of China’s resolve to maintain its economic and political ties with Iran, and Washington’s readiness to confront Beijing, will come in May or June, 2013 with the next six-monthly review, (On Dec. 7, 2012 Clinton announced the renewal of Iran sanctions exceptions for 9 countries including China, which will be able to continue buying reduced quantities of Iranian crude oil for the next 180 days without incurring U.S. penalties), of whether buyers of Iranian crude are continuing to reduce their shipments.

As for the future, Iran’s oil sector, hampered by years of mismanagement, sanctions, and lack of advanced technology to make it in a deteriorating situation; Iran hasn’t been able to make its OPEC quota since 2005 and this situation will not change in the near future. Meanwhile, according to the International Energy Agency (IEA), China’s oil demand tripled over the past two decades, increasing from almost 2.9 million barrels per day (mb/d) in 1993 to around 9.6 mb/d (around 5.5 mb/d were imported) in 2012 . In the medium term OPEC’s “World Oil Outlook 2012” forecasts that over the period 2011–2016, global oil demand will add 5.1 mb/d to reach 92.9 mb/d, with over 41% (2.1 mb/d) of that increase occurring in China alone.

Within this context, whether the sanctions continue or not, Iran need years if not decades to return to pre-Islamic revolution of 6 million barrels a day or more. Most important of all, the Iranian crude oil production isn’t going to expand much more in next decade if not decline. Unless sanctions are lifted, in the long run Iran is going to remain important but not as vital, as is the case with the Gulf States, especially Saudi Arabia and the growing importance of the Iraqi oil.

Dr. Naser AL-Tamimi is a UK-based Middle East analyst and Al Arabiya’s regular contributor with particular research interest in energy politics and political economy of Saudi Arabia, the Gulf and Middle East- Asia relations. The writer can be reached at: nasertamimi@hotmail.co.uk

Disclaimer: Views expressed by writers in this section are their own and do not reflect Al Arabiya English's point-of-view.
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