Throughout the continuing international stand-off over Iran’s nuclear program, China has found itself torn by conflicting economic and political impulses. While Iran is an increasingly important energy supplier for China’s burgeoning economy, for example, expanding commerce and investment with Tehran could jeopardize Beijing’s far more extensive bilateral trade with the United States and the European Union. Similarly, in the last decade, China has endeavored to portray itself as a responsible member of the international community, in part by demonstrating a strong commitment to nonproliferation. During late 2007, however, as the United States and the European Union placed new restrictions on financing and trade with Tehran, China overtook Germany as Iran’s primary trading partner. [1] A number of high-profile developments point to a further increase in China-Iran trade in the future. Such cooperation with Iran threatens to sully Beijing’s improved international reputation, especially at a time when the United States and Western European states are demanding that Beijing intensify pressure on Tehran to abandon its sensitive nuclear activities.

China’s Recent Trade and Financial Activities with Tehran

Oil Sector Investment
China is the world’s second-largest consumer of oil and must import about 50 percent of its oil to keep up with demand. Because China has limited capacity to increase domestic production, this percentage is expected to rise in the coming years. Iran is now China’s third-largest supplier of oil, and many of China’s on-going projects with Iran are oil-related.

In December 2007, China Petrochemical Corporation — more commonly known as Sinopec — signed a $2 billion dollar agreement with Iran’s Ministry of Petroleum, under which the former will help finance the development of the Yadavaran oilfield in southwestern Iran. [2] The Sinopec project will be carried out in two phases. The first phase will last about four years and should see the production of about 85,000 barrels of oil per day; the second phase will last an additional three years and should produce 100,000 barrels per day. [3] The U.S. government has expressed disappointment with the deal. [4] One U.S. official stated that Washington views any investment in Iran, particularly in oil and natural gas-related deals, as undercutting international efforts to pressure Tehran to over its uranium enrichment activities. [5]

Trade Financing
Recent restrictions imposed by Washington have caused many U.S. and foreign financial institutions to reconsider transactions involving Iranian entities. U.S. efforts in this regard are aimed directly at denying Tehran access to credit on the international financial market. [6] Although China’s government has remained skeptical about the value of this type of unilateral sanction, reports out of Iran and China in December 2007 appeared to indicate that Chinese banks were reacting somewhat to U.S. pressure for fear of being penalized by Washington. According to Iranian businessmen, Chinese banks began refusing to open letters of credit for Iranian-based enterprises. No specific explanations were given by Chinese banks for the apparent change in practice, but the activities coincided with an early December visit to China by U.S. Treasury Secretary Henry Paulson, during which he discussed the imposition of financial restrictions on Iran with Chinese banking officials. [7] The new limitations by Chinese banks may be short-lived; on December 17, 2007, Iranian state media announced that a business delegation from Iran, spearheaded by the Iran-China Chamber of Commerce, had brokered a deal with major Chinese banks that eliminated the new restrictions. No further details have surfaced about the agreement. [8]

Sensitive Material Transfers
U.S. pressure against Chinese military and dual-use exports to Iran continues to be a serious area of contention between Washington and Beijing, despite some improvements in bilateral cooperation in the area of nonproliferation. A number of Chinese companies are subject to U.S. trade sanctions for transferring sensitive commodities to Iran or otherwise giving material assistance to Iranian WMD and missile programs. [9] Beijing has objected to these sanctions in the past, often noting that the companies in question have not broken Chinese laws or that U.S. officials did not supply sufficient information to permit an investigation by Chinese authorities into the matter. [10]

According to U.S. officials, Washington formally complained to the Chinese government on many occasions in 2007 about what appeared to be a spike in the transfer of sensitive materials to Iran by Chinese companies. [11] The problem of Chinese companies exporting dual-use items to Iran was further highlighted by reports from U.S. intelligence sources indicating that a controlled compound that could be used for the production of missile fuel was shipped in the first half of 2007 from an unidentified Chinese company to the Iranian firm Shahid Bagheri Industrial Group — an entity identified in the annex to UN Security Council Resolution 1737 as involved in Iran’s ballistic missile program and subject to sanctions imposed by the UN Security Council in 2006. The shipment was stopped by export control officials in Singapore after a tip from the U.S. government. [12]

Many recent assessments of China’s export control system have pointed to positive movement
in controlling sensitive dual-use items and a recognition by Chinese authorities of the need to control the transfer of such items to countries like Iran. Notably, in 2002, China published a comprehensive set of export controls and in the last few years Beijing has focused resources on improving implementation, including in the training of export control officials. Beijing has also begun implementing stronger rules on industry compliance that place more responsibility on companies to ensure internal compliance with export control regulations. (See related discussion in “China Strengthens Nuclear-Related Export Controls" in WMD Insights, April 2007.) China, as a member of the UN Security Council, supported the passage of Resolution 1540 in April 2004, which requires UN members to implement stronger export control systems and take other measures to stem WMD proliferation from within their borders. However, questions still remain about the willingness or commitment of China’s top leadership to fully enforcing domestic regulations and curbing the activities of Chinese companies in Iran. [13]

China’s Balancing Act
Figures from China’s General Administration of Customs showed a year-on-year increase in China-Iran bilateral trade of 35 percent in the period January-October 2007, with a total trade volume in that period of $16.6 billion. [14] These figures do not factor in the volume of Chinese goods shipped to Iran via front companies and brokers in Dubai, which is estimated to reach into the billions of dollars. [15] However, this volume is dwarfed by Chinese trade with the European Union and the United States. For the same period as measured above, according to official Chinese statistics, China-EU trade equaled $112.5 billion, while China-U.S. trade totaled $221.4 billion in the first three quarters of 2007. [16]

While the trade statistics show that Beijing has a clear economic incentive not to alienate the United States and Europe in favor of Iran, China’s increasing need for Iranian oil and natural gas complicates Beijing’s decision-making. Iran and China also have a long history of economic cooperation and diplomatic relations that affects Beijing’s view towards increasing trade-related sanctions on Iran.

The November 2007 U.S. National Intelligence Estimate (NIE) on Iran, which stated that in 2003 Iran had halted its activities specifically focused on designing and fabricating a nuclear weapon, has appeared to further strengthen China’s opposition to multilateral sanctions in the short term. Soon after the release of the report, China’s ambassador to the United Nations, Wang Guangya, noted that the Security Council would only be looking at “incremental” change in punishing Iran. Wang further alluded to the fact that, in light of the NIE, focus should be placed on developing “a strategic plan [for] what to do next for a diplomatic solution.” [17]

Unofficial discussions with senior Chinese leaders have indicated that Beijing wants to avoid any military conflict – and the international chaos that might bring – over Iran and believes that Washington must be more patient with the current diplomatic process. [18] Recent statements by China, while ambiguous about substantive moves, relay a clear concern about the nonproliferation implications of Iranian activities. China is also reported to have been recently urging Iran through various channels to improve its compliance with international obligations, following a consistent pattern in Beijing of pressing for a diplomatic solution to the crisis. [19] During a low-key visit to Tehran in November 2007, China’s Foreign Minister Yang Jiechi called on Iran to strengthen its cooperation with the IAEA and remain “flexible” with regards to solving the current nuclear impasse. [20]

If Iran walks away from current negotiations or otherwise appears unwilling to cooperate with diplomatic efforts, China’s resistance to the idea of further multilateral sanctions will likely weaken. Although U.S. and European leaders have been riled by China’s continued cooperation with Iran, Beijing’s relatively close relationship with Tehran could ultimately play a positive part in resolving the current crisis, once China is ready to engage more actively.

Stephanie Lieggi – Monterey Institute James Martin Center for Nonproliferation Studies