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Foreign Policy

China and Iran: Friends in Need

Oct 09 , 2014

On September 21, two Chinese navy warships docked in the Iranian port of Bandar Abbas for the first time in preparation for a joint naval exercise. Chinese naval ships are a rare sight in such distant waters, though they have been seen patrolling the Gulf of Aden since 2009 in escort missions on shipping lanes prone to disruptions from piracy. The naval exercise, two months before the deadline for reaching a deal on Iran’s nuclear programme, is a reflection of the strategic importance that China attaches to Iran, and of Beijing’s concern over a potential easing of sanctions on Iran.

Not just about energy

Modern day Sino-Iranian ties seem to be all about energy. China – the world’s largest oil importer and a rising natural gas consumer – relies on Iran for over 10% of its imported oil, while Iran holds the world’s fourth largest oil reserves and second largest natural gas reserves. Since the 1990s Chinese firms have been investing in the Iranian oil sector, capturing a growing share of the market. As Iranian legal barriers to foreign ownership and an unappealing contractual framework eroded Iran’s appeal for foreign investors, compounded by concerns over the Iranian nuclear programme and the various sanctions regimes since 2007, Western oil companies and traders have minimized their investments in the country, leaving Chinese firms to step in and fill the gap.

But while energy has clearly become a central part of the relationship, it is by no means the only, or most significant, component of bilateral ties. China is Iran’s largest trading partner. Two-way trade reached $36 billion in 2012, according to China’s Ministry of Foreign Affairs, and more importantly, one of its most reliable since US sanctions on the country went into full force in 2010. Trade includes crude oil and products, but also manufactured goods, electronics and arms. Chinese investments in Iran span mining, transportation, power generation and the auto industry.

Rising powers

More fundamentally, China views Iran as a rising power in the Middle East and a geostrategic hedge against the US. The two countries’ long history and ancient cultures also reinforce bilateral ties. Tehran’s lack of interest in China’s policy toward the Muslim population in the restive province of Xinjiang is an additional cementing factor. As such, Iran is a key part in China’s “Marching West” (Xijin, 西进) strategy, a term coined by Wang Jisi, the dean of the school of Internal Studies at Renmin University in Beijing in 2012. Wang argued that China should look west to Central Asia, South Asia and the Middle East, and expand its presence there in order to better serve China’s geostrategic, economic and security interests. The Chinese leadership’s new priority, to develop a maritime Silk Road economic belt and revive the land-based Silk Road, echoes the idea of “Marching West.”

Silk Road redux

Iran is a central piece of China’s Westward surge: The Silk Road, According to Xinhua, will run southwest from Central Asia to northern Iran, before heading West through Iraq, Syria and Turkey, and then to Europe where it ends in Venice, Italy. The emphasis on building infrastructure along it, designed for a growing Chinese commercial and perhaps strategic presence, will generate economic growth for China and host countries along the way. But it will also require solid partnerships.

It would therefore come as no surprise that Beijing wants to step up its naval engagement with Iran, and in the Persian Gulf more broadly, given that half of its oil imports come from the region and it has a growing number of investments there. Moreover, as the US shale revolution redefines American oil and gas import flows and reduces the need for imports from the Persian Gulf, it is natural for Beijing to beef up its presence in a sign of its growing international weight and rising naval clout. Yet China’s navy, which is only gradually experimenting with engagements in the far seas, has tried to limit its presence to less contentious anti-piracy escorts in the Gulf of Aden. Its ability, and Beijing’s willingness to project power in the Persian Gulf is still an open question.

Fault lines exposed

Instead of a sign of great power, could the naval visit also be a sign of growing concern? Despite a long history of ties, and a depth of commercial engagements, the bilateral relationship is not without its challenges. Beijing, though reluctant to adhere to US-led sanctions, is still walking a fine line of compliance, reducing oil imports and sitting tight on upstream investments in order to preserve its ties with the US, still by far the most important bilateral relationship for China. Beijing still looks at Tehran’s nuclear brinkmanship with concern and mistrust. Threats of shutting down the Straits of Hormuz are as much a concern to Beijing as they are for Washington, Tokyo or London.

For many in Iran, China is the partner of last resort. Iranian merchants are increasingly concerned with the rise of Chinese traders and manufactured goods in the country. Beijing’s attempts to placate Washington (and preserve the ability of Chinese companies to operate in the US market) periodically raise Tehran’s ire. For example, Tehran ended CNPC’s contract for the Azadegan oil field in April 2014, citing CNPC’s non-compliance with the terms of the deal. Iranian officials have long preferred Western oil and gas firms that they deem more reliable and superior in their technical knowhow to their Chinese counterparts. Indeed, as the prospects of easing sanctions loom large, the Iranian government is trying to woo Western oil and gas firms back into the Iranian upstream, pledging to change the contractual framework that hindered many projects in the past.

These tensions, while not fundamentally destabilizing, may still lead Iran to diversify its partners and investors if a deal is reached between Iran and the P5+1. Moreover, Washington and Tehran have more shared goals in the region, especially in the context of the emergence of the Islamic State (IS) in Iraq as a common enemy, just as high-level contacts are increasing. This will not undermine the strong foundations of Sino-Iranian ties, but it will certainly decrease China’s leverage. As a result, Beijing must respond and show Tehran that it remains a reliable partner, and that it is willing to deepen its engagement. But Beijing might now be feeling the need to up the ante. After all, it may soon find that it is no longer the only act in town.

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