Balancing Growth

LONDON

As a country importing 11 percent of its oil from Iran, the latest American and European move to isolate Iran has put China in a quandary. Should it join the West with which it has close economic ties, or ignore the call for sanctions on Iran, not backed by the United Nations, to maintain its energy security? With the recent visit of Chinese Prime Minister Wen Jiabao to three oil-rich Gulf monarchies, Beijing’s deft diplomacy has sidestepped the issue.

Wen highlighted main principles of Beijing’s foreign policy: non-interference in other countries’ affairs; prioritizing energy security by ensuring steadily increasing supplies of oil and gas; and expanding trade. This set of guidelines has proved adequate, so far, to enable China to navigate the turbulent Middle East.

Wen described China's oil trade with Iran as “normal trade activity” at the 18 January press conference in Doha. “Legitimate trade should be protected, otherwise the world economic order would fall into turmoil.”

He spoke against the background of US Treasury Secretary Timothy Geithner’s Beijing visit to persuade Chinese leaders to “wean themselves off Iranian oil” and Washington’s imposition of sanctions on Zhuhai Zhenrong Company, a state-owned Chinese oil corporation.

The United States alleged that Zhuhai Zhenrong had violated US sanctions by brokering delivery of gasoline, worth $500 million, to Iran from July 2010 to January 2011. It barred Zhuhai Zhenrong from receiving US export licenses, US Export Import Bank financing or loans over $10 million from US financial institutions. The restrictions are largely symbolic because, according to the company’s spokesperson, “We have never had any business cooperation with any United States companies.”

Liu Weimin, the foreign ministry’s spokesman, said that “China’s regular demand for energy does not have anything to do with the Iranian nuclear issue and should not be affected. To place one country’s domestic law above international law and press others to obey is not reasonable.”

China’s stance stands in contrast to what the White House aims to achieve. Following Geithner’s meetings in Beijing, a US official explained that the Obama administration was “in the early stages of a broad global diplomatic effort to take advantage of this new legislation to significantly intensify the pressure on Iran” regarding its nuclear program. He was referring to the Defense Authorization Act, signed into law on 31 December, which includes targeting foreign financial institutions doing business with Iran's central bank, notably to buy petroleum.

Referring to the Geithner mission, the Global Times – a tabloid owned by the People’s Daily, official organ of the Chinese Communist Party – described it as another sign of America’s “Big Power mindset,” to be ignored.

Beijing is the largest buyer of Iranian petroleum, accounting for 20 percent of Iran’s exports – the same as all 27 members of the European Union combined. China’s thirst for petroleum is rising so fast that, according to Goldman Sachs, it will become the globe's largest importer of oil by mid-2013.

Iran became an early supplier of oil to China once the Beijing government decided to import it in 1993. A decade later China National Petroleum Corporation (CNPC) and Sinopec became involved in developing Iran’s hydrocarbon resources.

In November 2004, while Washington tried to get Iran’s nuclear file referred to the UN Security Council, Sinopec and National Iranian Oil Company (NIOC) and Iran LNG signed memorandums of understanding for the development of the Yadavaran oilfield, containing 3.2 billion barrels of oil and 2.7 trillion cubic feet of gas – the biggest hydrocarbon deal so far by any member of the Organization of Petroleum Exporting Countries.

In March 2008, while the Security Council imposed a third set of sanctions on Tehran, pertaining to nuclear and missile programs, China and Iran struck a three-year $3.39 billion deal to produce liquefied natural gas, LNG, in Iran's mammoth South Pars field. Another deal with CNPC followed in January 2009. Later that year, the Chinese companies inked $8 billion worth of contracts with Iran to help expand two Iranian oil refineries.

To overcome rising hurdles erected by Washington for Iran to conduct dollar-denominated transactions, Beijing and Tehran resorted to barter trade. In July 2011 they signed several agreements, committing Chinese corporations to invest in Iranian infrastructure projects, with Tehran agreeing to export chrome ore to China.

In pursuit of energy security, China’s leaders decided more than a decade ago to reduce the proportion of its oil imports carried by tanker because of the vulnerability of shipping lanes from the Persian Gulf and East Africa to its ports.

At present among China’s top four oil suppliers – Saudi Arabia, Angola, Iran and Russia – only Russia is supplying nearly 400,000 barrels per day to China by overland pipeline. Of the remaining three, only Iran offers potential of overland pipelines.

A gas pipeline from Xinjiang province of China running through the Central Asian republics to Turkmenistan – already linked by gas pipeline to eastern Iran – was commissioned in December 2009. Two months earlier, in a meeting with Iran’s first vice-president in Beijing, Wen referred to deepening cooperation in trade and energy between the two nations, adding that China attached importance to “close coordination in international affairs” with Tehran

Wen’s statement reflected the consensus among a network of Chinese think tanks that Iran is a rising power in the Middle East, gaining influence at the expense of America. Addressing the Fourth China-Arab Business Conference in Sharjah, United Arab Emirates, Wen pointed out that the trade between China and the Arab world registered record figures in 2011 despite political turbulence.

China had good relations with oil-rich Libya under Muammar Gaddafi. Along with Russia, it was angered by NATO’s interpretation of the UN Security Council resolution in March, to protect civilians, by siding with anti-Gaddafi forces in the civil war. Within three months of Gaddafi’s downfall, Beijing bought 67,000 barrels per day from the new regime.

During Wen’s tour, Sinopec sealed an $8.5 billion deal with Saudi Aramco for a joint-venture oil refinery and signed a memorandum of understanding with Saudi Arabian Basic Industries Corporation to build a petrochemical plant in Tianjin, China. Saudi Arabia supplies almost twice as much petroleum to China as Iran. Beijing remains wedded to its traditional policy of non-intervention into the domestic affairs of other countries. Along with Russia, it vetoed the Security Council resolution on Syria in October 2011 calling for sanctions against the Assad regime for violent repression of protestors. Wen welcomed the Arab League’s mediation efforts to defuse the crisis and appealed to the international community to play a constructive role.

He did the same when alluding to Iran, arguing that in view of “the instabilities and complexity in the region,” the easing of tensions is “in the interests of all relevant parties.” At the same time he declared: “China supports nuclear non-proliferation, and would be against Iran should it be developing or possessing a nuclear weapon.” Given that China has been a signatory to the 1970 nuclear Non-Proliferation Treaty since 1992, Wen’s statement merely reiterated a long-held policy.

As a rising global power, China favors the region’s status quo, gambling it can continue to fulfill its growing hydrocarbon needs from the Middle East, acquiring a larger footprint there while spurning the West's pressure to join its anti-Iran drive.

Dilip Hiro is the author of After the Empire: The Birth of a Multipolar World (Nation Books, New York and London). His forthcoming book is Apocalyptic Realm: Jihadists in South Asia, to be published by Yale University Press in April. Rights: Copyright © 2012 Yale Center for the Study of Globalization