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Jun 28, 2012 | 10:59 GMT

The Implications for China of U.S. Sanctions on Iran

The Implications for China of U.S. Sanctions on Iran
China Photos/Getty Images
Summary

The United States has until June 28 to exempt foreign banks that finance business operations in Iran from sanctions that would bar them from U.S. markets. So far, banks from most major buyers of Iranian crude, such as Japan, South Korea, Taiwan, India and a number of European countries, have received exemptions. But China, which accounted for more than a fifth of Iran's crude exports in the latter half of 2011, is conspicuously missing from the exemptions list. Even if China does not receive official exemption, Beijing and Washington have an interest in working around any moves that would threaten to significantly alter bilateral ties between the two countries.

While China, like Japan and South Korea, cut Iranian crude imports significantly in the first few months of 2012, it will not be exempt from sanctions, ostensibly because of the nature of these cuts. Whereas other countries' energy firms appear to have slashed Iranian crude imports in direct response to U.S. and EU sanctions, with Seoul promising to stop importing crude altogether when EU sanctions take effect July 1, the drop in China's own imports follows a pricing dispute between Unipec — the international trading arm of state-owned Chinese energy firm China Petroleum and Chemical Corp. (Sinopec) — and Tehran. Once the pricing dispute is solved, imports will presumably return to normal, as a recent rebound in crude import levels suggests. During the second half of 2011, China's imports were also higher than normal while China prepared for the sanctions campaign.

Currently, two trading companies are responsible for most of China's crude imports from Iran: Zhuhai Zhenrong and Unipec. Sinopec controls almost all refining operations. Given Sinopec's growing investments and interest in developing U.S. energy resources (particularly unconventional natural gas projects), as well as its international reach as one of China's three major energy firms, it is a far more likely and potentially effective target of U.S. sanctions. If these sanctions functioned perfectly, then Chinese banks that finance Unipec would not be able to conduct business in the United States or with U.S. companies abroad. This could do real damage to a wide variety of Chinese business and energy operations in the United States because they will be prohibited from accessing U.S. financial markets.

But the success of U.S. sanctions presumes a number of factors. First, that Beijing will not simply shift financing for Unipec away from the four largest banks, three of which account for the majority of Chinese financial operations in the United States, or even create a specialized bank to handle business with Iran. This might be complicated if the U.S. sanctions applied to Sinopec, from which it would be much more difficult for major state-owned banks to divest. Even then, Beijing has recourse to another — and in many ways easier — strategy to evade sanctions: to operate crude trading through a diverse succession of shell companies. 

For Beijing, a stable source of crude supplies is essential to maintaining economic growth. Since it became a net oil importer in 1998, China's demand has grown exponentially — starting in 2009, Chinese energy firms imported more than half of the country's total supply. Iran, with its massive reserves of relatively high-quality crude, is an optimal source; in recent years, 10 to 13 percent of China's total imports came from Iran. While the pricing dispute with Unipec did bring Chinese imports from Iran down 31 percent in the first quarter of 2012, and although Beijing has made clear its intention to gradually diversify suppliers, Iran will continue to be an important supplier in the near future.

Neither Washington nor Beijing will back down from its position regarding Iranian sanctions. For the United States, economic sanctions address a variety of needs, including serving domestic politics during a campaign season and affecting ongoing military and diplomatic issues in the Middle East. Beijing is adamant — as it always has been — in condemning any unilateral imposition of sanctions. But beneath the surface of tension between China and the United States over the Iran issue lies a certain synergy.

Beijing cannot afford to drastically, and eventually completely, cut Iranian imports, for reasons both economic (China's continually rising energy needs) and political (Beijing's long-standing interest in maintaining a partnership with Iran). Moreover, there have not yet been significant moves by any other supplier to permanently increase production enough to offset a significant portion of China's imports of Iranian crude. There is not yet a reliable, long-term replacement. Likewise, the United States cannot afford to bar major Chinese financial institutions from investing in U.S. companies and projects. Whatever the written word of the sanctions, both the United States and China will continue to work to prevent them from complicating bilateral relations.

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