Iran tops agenda as Chinese chief visits gulf

Beijing opposes sanctions, but worries how they might boomerang on its economy.

An oil drilling rig 311 (photo credit: Andrea De Silva / Reuters)
An oil drilling rig 311
(photo credit: Andrea De Silva / Reuters)
Chinese Premier Wen Jiabao’s six-day visit to the oil powers of the Gulf doesn’t include Tehran on the itinerary. When he addressed the World Future Energy Summit in Abu Dhabi he talked about alternative energy and when he got to Saudi Arabia the official Chinese news agency Xinua reported that talks were devoted to Chinese investment in local infrastructure projects.
But no one doubts that at the top of Wen’s agenda is Iran and how China can keep fueling its economy as Western powers step up sanctions and security threats to shipments grow. Analysts say the premier’s top priority is to keep relations with the Saudis smooth even as China bucks the sanctions that Riyadh backs by continuing to buy Iranian crude.
RELATED:Iran warns Gulf states not to replace its oil Tehran: Obama letter to Khamenei contained 'nothing new'“The whole agenda is non-Iran. But, of course, you can’t understand the trip without the Iranian context. It was a surprise that Wen was going at all. Usually the Chinese plan these trips a long time in advance,” Michal Meidan, a China analyst in London with the Eurasia Group, told The Media Line. “There is a real desire that relations with Saudi Arabia remain stable.”
Wen’s tour comes as an economic noose is tightening around a defiant Tehran. US President Barack Obama last month authorized a law imposing sanctions on those dealing with Iran’s central bank, its main clearing house for oil exports, and has enlisted Asian powers like Japan and South Korea to join the boycott. European leaders are due to meet January 23 to weigh their own sanctions plan.
In response, Tehran has hinted it is ready to close the Strait of Hormuz, the narrow outlet through which the Gulf’s vast oil exports flow, and has warned Arab producers against stepping up production to compensate for banned Iranian oil. Two weeks ago it staged a high-profile naval exercise around the Strait.
China hasn’t joined the Western sanctions effort – indeed, Beijing gave US Treasury Secretary Timothy Geithner a “No” when he visited last week to try to recruit China into the sanctions campaign – but it realizes that its supplies of Iranian oil are no longer as secure as they once were. Analysts say it wants to make sure the Saudis will be able to open the taps if needed.
“It’s not only that China wants to consolidate trade relations with Arab gulf countries, but it’s a message to Iran that China has adopted an open-ended policy. They will rely not only on Iran but also on Saudi Arabia and the other Gulf countries. China is not in the Iranians’ pocket,” Yitzhak Shichor, an expert on China at Israel’s Haifa University, told The Media Line.
“This visit is an attempt to inculcate a relationship with the Gulf countries and a signal to Iran to be careful,” he said.
Although China and Iran have extensive trade and investment ties that go beyond energy, analysts say bilateral relations are tepid.
Chinese leaders were embarrassed when Vice Foreign Minister Zhai Jun visited Tehran at the end of December. There he urged the leaders to cooperate with the International Atomic Energy Agency and resume talks with the West on its disputed nuclear program. But soon after Zhai departed, Tehran announced it had begun uranium enrichment at an underground facility.
Yet Beijing’s ability to maneuver with the Iranians is limited and decisions are taken with the needs of the country’s economy in mind.
Even if it relies more on petroleum from Saudi Arabia and Angola, China gets about 10% of its oil from Iran. It cut purchases in 2010, but increased them again last year. It has not signed a new supply contract with the Islamic Republic amid a dispute over terms, which means its purchases will drop by more than half in the first two months of the year.
Already the world’s second-largest oil consumer, China is a voracious and growing user of energy even as its economic growth cools off. Its crude imports slowed to nearly a third of their pace of 2010, but they nevertheless grew 6%. The Reuters news agency quotes analysts as saying that this year imports will grow between 5% and 7%, or 500,000-600,000 barrels per day.
Meidan said the ups and downs of Beijing’s imports from Iran are based on commercial considerations. The contract dispute right now is not an unofficial way of joining the boycott. Rather China is using the negotiations to win a lower price from its hard-pressed supplier.
“If the Iranians are backed in corner, and Japan and South Korea start reducing crude liftings from Iran, the Iranians will have to cave in to Chinese demands,” she said.
For the US, this isn’t necessarily a bad thing, she explained. A widely observed boycott of Iranian oil could wreak havoc in the oil market, sending prices higher and putting the global economy at risk of recession. “Washington understands that having all Iranian crude off line will impact markets,” Median said. “[But] if the Chinese continue buying, as long as it is at discounted prices, it hurts the Iranian economy.”
As a longer-term insurance policy, China sealed a deal with Saudi Arabia during Wen’s visit to build an oil refinery in Yanbu on Saudi Arabia’s Red Sea coast, far away from Iran’s military reach. Slated to be operational in two years, the plant will have a capacity of 400,000 barrels per day.
The refinery plans have been underway for some time, but signing the deal during a high-profile visit when Sino-Iranian relations are fraught with uncertainty, the deal was also a signal to Tehran, analysts said.
“The Chinese are very smart,” said Shichor of Haifa University. “They’ve known for a long time that Iran is going to be trouble, that there will be some problems ahead one way or another. They started preparing for alternatives with substitutes, which is primary Saudi Arabia.”