ISSN 2330-717X

Beyond JCPOA: China – Analysis

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While the US economic sanctions are likely to have implications for China’s investments in Iran, they inadvertently motivate Iran to look out for alternatives for driving its economic growth engine and seeking the much needed investments in its energy and infrastructure sectors.

By Ketan Mehta

One of the likely ramifications of the United States’ pull-out from the JCPOA will be China further augmenting its engagement with Iran. China is a party to the JCPOA and in 2017 provided 1.5 million RMB to the International Atomic Energy Agency (IAEA) tasked to monitor Iran’s compliance with the accord. While this signifies China’s political support to the JCPOA, Beijing has stressed the need for all parties to comply with the accord. [1] Chinese President Xi Jinping was also the first foreign leader to visit Iran following the implementation of the JCPOA in January 2016. [2]

Iran, too, attaches considerable importance to its diplomatic relations with China. Following the US withdrawal from the JCPOA, Iran’s Foreign Minister Javed Zarif in May 2018 visited China in a bid to muster diplomatic support. [3] This is indicative of China’s vital role in Iran’s foreign policy in times of estranged relations between Iran and the US. There are several reasons to evince China’s role in Iran following the US withdrawal from the JCPOA.

In 2015 (the same year in which the P5+1 and the EU had reached the JCPOA with Iran) total bilateral trade between China and Iran amounted to more than USD 33 billion. It stood at USD 30 billion in 2016. [4] In 2017, the bilateral trade between the two countries grew by 19 percent and reached USD 37.18 billion. According to data from the European Commission, as of 2017, China has an almost 20-percent share in Iran’s overall foreign trade. [5] Despite US pressure to cut crude oil imports from Iran, China continues to be the top importer of Iranian crude oil. Iran’s crude oil export to China for 2017 stood at 571,275 barrels per day. [6] The opening of the Shanghai crude ventures in May 2018 gives rise to the possibility that China would now be able to repay for Iranian crude oil in RMB. [7] This could possibly reduce the role of the US dollar in Iran’s foreign trade. Both sides have also previously resorted to barter trade in the event of Iran’s limited access to international banking and finance. Additionally, China enjoys notable presence in Iran’s energy sector.

Beijing has jointly invested in Iran’s South Pars gas field alongside France’s Total. The China National Petroleum Corporation (CNPC) holds a 30 percent share in the USD 4.8-billion contract towards developing the phase 11 of the gas field. With the reckoning of US sanctions on Iran that would specifically target energy firms engaged in Iran’s oil and gas sector, the CNPC is touted to assume majority stake in the South Pars project if Total pulls out. While CNPC’s total investments to develop the North Azadegan oil field in Eastern Iran could amount to USD 2 billion, China’s other oil giant, Sinopec, has also invested USD 2 billion in developing the phase 1 of the Yadavaran oil field. [8] Moreover, by upgrading Iran’s ageing crude oil refineries, China has helped the former in reducing its dependency on imported petroleum from other sources.

In line with its Belt and Road Initiative, China continues to address Iran’s infrastructure needs. As of 2017, China’s Exim Bank has financed 26 projects in Iran and has provided loans worth USD 8.5 billion. [9] The bank will provide USD 1.5 billion to finance the electrification of the 3,200 km long Tehran-Masshad railroad that links Iran’s capital with the northeastern city of Masshad. The railroad ultimately plans to establish connectivity between the provincial capital of Xinjiang, Urumqi, and Tehran. [10] Chinese firms have also undertaken some notable infrastructure projects in Iran, including the USD 1.5-billion contract in 1995 to develop the Tehran metro, [11] a USD 1 billion contract to develop the high-speed railway network between Tehran-Qom and Isfahan, the construction of which began in 2015. [12] Iran has also invited China to contribute in the Chabahar port project. More recently, China’s ZPMC won the contract for supplying cranes to India Ports Global Ltd. that is engaged in the development of the Chabahar port. [13]

China-Iran relations are not limited to business ties, however elaborate they are. In times when the United Nations (UN) arms embargo precluded Iran from seeking access to modern military hardware, China has emerged a major supplier of defence equipment to Iran.

Media reports suggest that China provided military supplies to Iran via third parties including countries such as North Korea, bypassing the stringent international arms embargoes. Chinese firms also stand accused of erasing serial numbers from the armaments, making it difficult to trace the origin of the defence supplies. [14] According to figures released by the Stockholm International Peace Research Institute (SIPRI), between 2007 and 2017, China provided Iran with USD 316 million worth of arms. [15] China helped Iran establish a plant for the Nasr-1 missile which is identical to the Chinese C-704 anti-ship missile. Earlier, Iran had received the Silkworm anti-ship cruise missiles from China which were used against the Kuwaiti shipping in 1987. Though difficult to assess, the total value of these transactions is estimated to be as high as USD 10 billion. [16] Iran manufactures the Noor anti-ship missile (that is inspired by the Chinese C-802) and Kowsar anti-ship missile (inspired by the C-801 system). Chinese technology is also evident in Iran’s long-range ballistic missiles such as the Sahab 3. China’s major defence equipment manufacturer, North China Industries Cooperation (NORINCO) was earlier indicted by the US for having provided Iran with ballistic missile technology and related components. Iran currently operates the Chinese J-7 fighter aircraft (similar to the Russian Mig 21) and is a potential buyer of the third-generation J-10 and the JF-17 multirole combat aircraft.

While the US economic sanctions are likely to have implications for China’s investments in Iran, they inadvertently motivate Iran to look out for alternatives for driving its economic growth engine and seeking the much needed investments in its energy and infrastructure sectors. From a long-term perspective, regardless of interruptions, China is likely to stay engaged in Iran’s economy, incentivised by the latter’s geographical significance, its expansive market, and its enormous energy reserves.

This essay originally appeared in ORF Special Report Beyond JCPOA: Examining the consequences of US withdrawal.


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Observer Research Foundation

Observer Research Foundation

ORF was established on 5 September 1990 as a private, not for profit, ’think tank’ to influence public policy formulation. The Foundation brought together, for the first time, leading Indian economists and policymakers to present An Agenda for Economic Reforms in India. The idea was to help develop a consensus in favour of economic reforms.

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