China and the Iran nuclear deal

China and the Iran nuclear deal
The Iranian ambassador to China, Ali Asghar Khaji has said that China has a “positive role” in upholding the Iran nuclear deal (JCPOA). Khaji also warned that Iran could consider..

The Iranian ambassador to China, Ali Asghar Khaji has said that China has a “positive role” in upholding the Iran nuclear deal (JCPOA). Khaji also warned that Iran could consider “other options” if Iranian interests and rights from the deal aren’t preserved.

China is the largest importer of Iran’s crude oil and has reiterated its commitment to the JCPOA.

Background

Historically, China has maintained trade ties with Iran and Persia for thousands of years. Iran was a crucial stop on China’s historic Silk Road trade route and there is evidence of Chinese travellers in Persia. Diplomatic ties between Iran and China were first established in 1971. China maintained its relationship with Iran following the 1979 Iranian revolution and the ascent of Ayatollah Khomeini into power. Following the imposition of arms embargos by the West, China emerged as an important economic and military partner for Iran.

Today, China is one of Iran's main trade partners, accounting for approximately 22.3% of total trade. Trade between Iran and China has more than doubled since 2006 to $28 billion in 2017. In 2017 alone, their two-way trade increased by 21 percent. According to some estimates, China imports around 10% of its oil from Iran. Iran, strategically located between Europe and Asia, is also an important part of China’s Belt and Road Initiative, which it signed in 2016.

Iran nuclear deal

The Iran nuclear deal, also known as the JCPOA (Joint Comprehensive Plan of Action), was signed by Iran and major powers UK, China, France, Germany, Russia, and the US (the P5+1) in 2015. The deal was a result of almost a decade of sanctions due to Iran’s non-compliance with the Nuclear Non-Proliferation Treaty. Between 2006 and 2015, Iran lost an estimated $100 billion in oil revenue alone. According to the JCPOA, Iran would limit its nuclear ambitions in return for relief from a number of sanctions. It was declared that Iran had complied with the terms of the provisional agreement and sanctions were lifted in 2016. Read more on the nuclear deal here.

On May 8th, 2018, President Trump announced that the US would be withdrawing from the “decaying and rotten” nuclear deal. This move was taken against the advice of allies such as France and Germany, whose leaders lobbied for the Trump administration to preserve the deal. Iran has warned that it would not “remain in a deal that has no benefit” and threatened to resume its uranium enrichment projects.

Analysis

“Our Chinese friends again reaffirmed their stance against unilateral sanctions and actually pictured the framework of the future cooperation between the two countries on how to expand the relations,” Iran’s ambassador to China, Ali Asghar Khaji said in a recent interview. Khaji noted that China was one of Iran’s most important trading partners, as well as a major investor and the largest importer of Iran’s crude oil. Last year alone, China provided Tehran a $10 billion credit line, and signed a $700 million deal for a train line between Bayannur, in China’s Inner Mongolian Autonomous Region, and Iran.

Earlier this month, Iranian Foreign Minister Mohammad Javad Zarif met with his Chinese counterpart Wang Yi in Beijing.  Wang Yi reiterated Beijing's support for the deal, according to state media Xinhua. "China will take an objective, fair and responsible attitude, keep communication and cooperation with all parties concerned, and continue to work to maintain the deal," Wang said, adding the agreement was "hard-earned."

Zarif has also met with Russian foreign minister Sergei Lavrov, and EU officials, all of whom reiterated their support for the deal. Diplomats from Europe, China, and Russia are reportedly in the process of discussing a new accord to offer Iran financial aid in exchange for moderating its military activity in the region and curbing its ballistic missile program. Read more on Europe’s reaction to the deal here.

Observers have also noted that China would be a primary beneficiary from US’s withdrawal from the JCPOA as it could allow China to demand oil imports priced in yuan. "There has been speculation that restrictions on Iranian oil sales and the lack of access to dollar financing will boost demand for yuan-denominated Shanghai futures," said BMI Research. “With China deepening its energy ties with Iran and given Beijing's desire both to support the contact and — relatedly — to further internationalize the use of its currency, payment in yuan and benchmarking against Shanghai futures would seem logical."  

Iran’s oil minister Bijan Namdar Zanganeh has said that China’s state controlled national petroleum corporation (CNPC) could replace French company Total in a project to develop a major oil field, if it withdraws from Iran due to re-imposed sanctions. CNPC already has a 30% stake in the project and could acquire Total’s stake as well. Read more on this here.

"China is currently financing multi-billion-dollar power and infrastructure projects in Iran, while Russia desires to export manufactured goods," noted Justin Dargin, a Middle East energy expert at Oxford. "With the probable withdrawal of U.S. and European companies, Chinese and Russian companies stand to benefit." "The more that Iran is isolated by the West, and the more it forges relations with Russia and China, then further down the road, Iran will be less vulnerable to Western economic and diplomatic pressure in the future," Dargin added.

Counterpoint

While Western withdrawal could increase opportunities for Chinese businesses, political uncertainty, and possible sanctions could deter investment. The United States is China’s second largest trading partner. Iran accounts for less than 1% of China’s total foreign trade ($4.28 trillion). Furthermore, China is not immune to the threat of sanctions. The recent US ban on ZTE for doing business in Iran adversely affected the company’s business prospects. Beijing is already caught up in a potential trade war with the US.

"China is not wholeheartedly going to support Iran if it jeopardizes its own interests," said Scott Lucas, an Iran specialist at Birmingham University. "The Russians face their own economic pressures and so they are going to be limited in terms of what they can do." Hu Xingdou, economist from the Beijing Institute of Technology stressed that political instability was a deterrent. “China needs to learn from the past: it invested heavily in Libya and Venezuela and lost a lot,” Hu noted.

Assessment

Our assessment is that Beijing is likely to continue supporting the JCPOA as long as other signatories stand by the agreement. As a major importer of Iranian oil, it is in China’s interests to ensure relative stability in the Middle East. As stated previously, with fewer ties to the US financial system, Chinese corporations could see an opportunity in US’s withdrawal from Iran. We believe that China will not do business with Tehran if it believes that its trade ties with Washington are genuinely at stake. However, China has circumvented western sanctions in the past and may do so again.

 

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