China Won’t Rescue Iran

Despite reports of a major Chinese-Iranian trade deal, Beijing won’t jeopardize the possibility of better relations with Washington in order to cozy up to Tehran.

BY WANG XIYUE | DECEMBER 18, 2020

In June 2020, a draft of the China-Iran Comprehensive Strategic Partnership was leaked to the media by an Iranian source. In this purported deal, which ostensibly covers bilateral cooperation in economic, political, cultural, and military spheres for the next 25 years, China pledged a maximum investment of $400 billion to improve Iran’s oil, gas, and transportation infrastructure.

Some observers were quick to point out that this groundbreaking deal not only demonstrates China’s unrelenting ambition to succeed globally, but also shows the failure of the Trump administration’s so-called maximum pressure campaign against Iran, which instead has pushed Iran into China’s orbit. Others noted that should President-elect Joe Biden try to rejoin the Joint Comprehensive Plan of Action (JCPOA), the China-Iran deal would potentially harden Iran’s bargaining position vis-a-vis the United States. These commentators all regard the deal as a fait accompli, as if it has already been signed—but they are exaggerating China’s will and capacity to aid Iran in defiance of the United States.

Although China has been Iran’s largest trading partner since 2009, Iran has remained a minor one for China. Even in the Middle East, Saudi Arabia and the United Arab Emirates outperform Iran when it comes to trading with China. According to China’s Ministry of Commerce, at its peak in 2014, Chinese-Iranian trade was $51.85 billion, or 1.2 percent of China’s total foreign trade volume—and it has plummeted since then. That same year, China’s trade with Saudi Arabia and the UAE were $69.15 billion and $54.8 billion, respectively. In contrast, the volume of Chinese-U.S. trade that year was $555 billion, or 12.9 percent of China’s total foreign trade.

Geopolitically, infrastructure projects mentioned in the purported deal, such as Jask and Chabahar ports as well as railroad projects connecting Central Asia, if they materialize, would provide unique advantages to Iran rather than to China. These economic and geopolitical realities dictate that Iran does not occupy an irreplaceable position in China’s strategic calculations but is just one of the relationships Beijing needs to manage in the region. While China should be a factor in an effective U.S. strategy towards Iran, it would be unwise to assume that Beijing-Tehran ties have disproportionate importance.

The idea of the Chinese-Iranian comprehensive deal was proposed in early 2016 by Chinese President Xi Jinping during his state visit in Iran after the implementation of the JCPOA. Mindful of China’s unique role in engaging with Iran through the difficult period of sanctions before the nuclear deal, Xi hoped to expand Chinese-Iranian cooperation and apparently expected some kind of preferential treatment for Chinese commercial interests in Iran under the auspices of the JCPOA.

Indeed, following Xi’s visit, many large-scale Chinese companies arrived in Iran, optimistically expecting to explore new opportunities. Around this time, I was studying Persian in Tehran and conducting research for my dissertation on modern Iranian history. I was able to mingle and interact with many Chinese businessmen representing large state-owned enterprises through my social circles and witness firsthand the commercial dynamics between the two countries.

Despite initial optimism, Chinese commercial interests met a lukewarm reception and the preferential treatment for which China hoped fell short of expectations. Shortly after the implementation of the nuclear deal, many foreign companies suddenly started exploring Iranian markets. With potentially a wide range of alternative products and services becoming available thanks to the relaxation of sanctions, Iran’s business community suddenly made increasing demands on Chinese businesses.

Iranians have long had a clear preference for all things Western. They also tend to be prejudiced against Chinese products and services, even when they are comparable in quality and lower in price than Western equivalents. Even Iranian state media was known for subtly insinuating the inferiority of Chinese-made goods and promoting other cultural and political biases toward China.

Chinese businessmen complained that, to their frustration, their Iranian partners often wanted a higher amount of Chinese investment but a lower proportion of Chinese products, services, and technologies in joint projects. Iran strongly prefers to partner with Western companies when possible, presumably due to a cultural reflex and a strategic consideration: It is politically and economically safer to cooperate with multiple partners than with just one. For example, even though China has long coveted South Pars, the world’s largest oil and gas field, Iran did not hesitate to give the South Pars Phase 11 project to the French oil and gas giant Total, making it the majority shareholder of the joint venture, with the China National Petroleum Corporation (CNPC) the second-largest shareholder in the project after Total.

After the Trump administration withdrew from the JCPOA and reimposed sanctions against the Islamic Republic, many Chinese businesses also suspended their projects or left Iran just as their Western counterparts did, due to the blockage of payment channels and increased financial risks in investing in the Iranian market because of U.S. secondary sanctions.

Although at the height of U.S. sanctions after 2018, China remained the biggest buyer of Iranian oil—with a steep discount since Iran is not in a position to dictate prices—Chinese payments for Iranian oil are not being remitted back to Iran in the form of much-needed foreign exchange. They are being used instead to pay down Iranian debts owed to Chinese oil companies for work done in Iran or held in China’s Bank of Kunlun, the sole Chinese bank handling oil-related transactions with Iran, only for “humanitarian transactions” of food and medicines. It reportedly costs the Iranian regime a fortune—at least 12 percent of the amount—to transfer, through illicit channels, some of these funds.

As the Chinese-Iranian strategic deal became news this summer, an Iranian businessman who had been dealing with China questioned the media reports sarcastically. He pointed out in the Iranian press that Chinese banks were refusing to deal with Iran and closing the bank accounts of Iranian students and businesses in China because of pressure from U.S. sanctions, right at the time when Tehran was touting a deal that was supposed to save Iran from crushing U.S. sanctions.

The claim that the Chinese-Iranian partnership would include significant cooperation in the military sphere, especially China maintaining a military base on Iran’s Kish island, is also doubtful. The Iranian popular wariness of foreign military presence on its territory notwithstanding, China has been careful not to bring Iran too close in its security sphere. Since 2008, Iran has been eager to become a full member of the Shanghai Cooperation Organization (SCO)—a Eurasian security and economic alliance effectively led by China.

Despite Russia’s recent explicit support, China has not allowed Iran to become a full member of the organization. Beijing will likely continue blocking Iranian membership in the SCO in the foreseeable future, since maintaining a balance of power among regional actors in the Middle East by not taking sides is clearly in China’s interest, and challenging a regional order adjudicated by the United States through bolstering Iran in a security alliance is obviously undesirable for China. Given Beijing’s aloofness, any permanent and close military cooperation with Iran appears improbable.

The purported deal is mostly an Iranian gambit at China’s expense and appears to be an Iranian public-relations ploy. Tehran is seeking to appease domestic discontent over the grim economic situation caused by the regime’s “maximum resistance” policy, by suggesting that China has Iran’s back. It also allows Iran to flaunt its so-called China alternative. News of the deal benefited only Tehran, as it exacerbated the heated U.S. debate on the efficacy of the Trump administration’s maximum pressure campaign and implied that the policy has failed.

From China’s perspective, the news of the deal was badly timed. It confirmed and aggravated the sense of a Chinese peril in the United States, at a time when U.S. policymakers from both sides of the aisle have serious concerns about China’s rise and apparent global ambitions—epitomized in its Belt and Road Initiative. Beijing has been trying to mitigate anti-Chinese sentiment and rhetoric in the United States and was probably not pleased by such high-profile media stories about China cementing a deal with America’s archenemy, Iran.

In fact, China has until now remained reticent about the deal. No Chinese media outlets have reported or analyzed the deal based on Chinese sources. When asked by reporters, Chinese Foreign Ministry spokespeople twice avoided making any comments. China’s silence on the matter is telling. Beijing understands that to sustain its own economic growth, it must manage hostilities and continue its modus vivendi with the United States. It should be apparent to Beijing that if China opts to closely cooperate with Iran, any future escalation of U.S.-Iranian tensions (which could easily happen) would also further strain already delicate relations between Beijing and Washington. Consequently, if the United States plays its cards carefully, China is unlikely to stand by Iran.

While China is and will be a formidable challenger in a U.S.-dominated world order, China’s determination and capability to act as Iran’s “economic alternative” in the face of U.S. sanctions should not be exaggerated. When Hong Kong’s pro-Beijing Chief Executive Carrie Lam has been left without a bank account, her salary having to be paid in cash due to U.S. sanctions—even in China’s own special administrative territory—one should question to what extent China can actually defy U.S. sanctions, if the United States is determined to enforce them, and economically support Iran without suffering some serious blowback.

It is worth remembering that in December 2018, only a month after U.S. sanctions against Iran’s oil and gas sector had gone into effect, in the midst the U.S.-China trade dispute, CNPC suspended its investment in Iran’s South Pars gas field project, which it had just taken over from France’s Total in August after the latter announced its withdrawal from the project. Due to U.S. pressure, by October 2019 CNPC had completely pulled out from the project.

This does not mean Iran and China will not have limited cooperation, much like Iran’s relations with other Asian powers like India. Major economies such as China and India would like to diversify their oil supplies for energy security and have access through Iran’s transportation network to a broader international market. If Beijing is indeed negotiating the deal with Tehran, it will at least want to assess its options after the incoming Biden administration’s foreign policy has taken shape before deciding whether to formally commit itself to an approach that could anger Washington. China’s paramount foreign policy goal in the coming years will be to repair its relations with the United States. Any potential deal with Iran will only be subordinate to this larger imperative

China’s interests in Iran would be best served by a situation of manageable tension between Iran and the United States—when there are sufficient sanctions to keep major international competitors away so that Chinese businesses can dominate Iranian markets, but not too much hostility or strong enough sanctions to stop the flow of capital. According to a recent interview with Iranian foreign minister Mohammad Javad Zarif with a Chinese media outlet, Tehran is clearly expecting some kind of sanctions relief from the United States under the Biden administration.

Zarif shared his belief that the China-Iran deal will be signed soon if the U.S. sanctions are eased. This means that if the Biden administration offers political and financial concessions to Iran too soon, it will create a welcoming environment for Chinese investment in Iran. In such a scenario, Beijing could sign the deal or a modified version of it, and the China-has-got-Iran’s-back story would become a self-fulfilling prophecy.

Judging from the current situation, however, if the United States decides to engage China as it crafts a new U.S. strategy toward Iran, China may well abandon Iran by delaying and remaining noncommittal about the bilateral deal as it works to ameliorate its relations with the United States. After all, China and the United States are the superpowers on the geopolitical chessboard—and even if Iran is more than a mere pawn, in Beijing’s view it is ultimately dispensable.

Wang Xiyue is a Ph.D. candidate in history at Princeton University and an incoming Jeane Kirkpatrick fellow at the American Enterprise Institute in Washington. He was imprisoned in Iran from Aug. 7, 2016, to Dec. 7, 2019. Twitter: @XiyueWang9