US sanctions on Iran may give China an edge

Oil-thirsty Chinese can ramp up business ties with Iranians if European investors leave

BEIJING • The United States' decision to reimpose sanctions on Iran could scare off European investors, but oil-thirsty China may step into the void and ramp up business links with the country.

China, which is already Iran's top trade partner and one of its biggest buyers of crude, has signalled that it intends to keep working with the Islamic regime despite the US move.

Beijing is a signatory of the 2015 Iran nuclear deal that had eased sanctions on Teheran, but US President Donald Trump quit the accord earlier this month and said Washington would reinstate punitive measures.

"By driving away American, European and Japanese companies, the sanctions could increase opportunities for Chinese businesses," Mr Hu Xingdou, a Beijing-based economist, said.

The Iran deal has been highly profitable for the Asian giant. Chinese businesses involved in Iranian developments are worth at least US$33 billion (S$44.3 billion) as of June last year, according to Beijing's Commerce Ministry, part of the country's ambitious Belt and Road global infrastructure initiative.

Last September, China provided a US$10 billion credit line to five Iranian banks financing water, energy and transport projects and, in March, the two countries inked a US$700 million deal allowing China to build a train line that links the port of Bushehr to the rest of Iran's railway network.

Beijing now has its sights on the expansion of a major Iranian gas field, with state-owned oil company CNPC set to replace Total if the French energy behemoth withdraws from the project over US sanctions.

Mr Trump's move to reimpose sanctions will affect all firms that operate in US dollars or do business on American soil, hitting European companies especially hard. But the lure of fresh hydrocarbons could prove irresistible for China, the world's largest crude oil importer.

CHANCE FOR CHINESE BUSINESSES

By driving away American, European and Japanese companies, the sanctions could increase opportunities for Chinese businesses.

MR HU XINGDOU, a Beijing-based economist.

Iran is currently China's fifth top oil supplier, with more than a quarter of its output going to Beijing. Bolstered by the flow of black gold, Chinese-Iranian trade leapt by 20 per cent last year to US$37 billion.

European companies could be hit hard by US sanctions. Total started the huge US$4.8 billion gas field project known as South Pars 11 in last July, two years after the nuclear deal between Teheran and Western powers prompted the return of many businesses to Iran.

But the French company said on Wednesday that unless it is exempt from US sanctions, it would "not be in a position to continue" the project, leaving the door open for CNPC to take its place.

Iranian Oil Minister Bijan Namdar Zanganeh has said that if Total pulls out, its share of the project - slightly over half - will be handed to the Chinese firm.

The price of Iranian oil is likely to fall as its pool of buyers shrinks, making it "more attractive" to the Chinese, Mr Victor Shum, vice-president of the energy group at IHS Markit, told CNBC.

And with Washington targeting transactions made in dollars, the yuan could be used to skirt around the new rules.

Chinese Foreign Ministry spokesman Geng Shuang made clear last week that Beijing would keep doing business with Teheran: "We will continue with our normal and transparent practical cooperation with Iran on the basis of not violating our international obligations."

Nevertheless, in the end, political uncertainty in Teheran could deter Chinese investment, Mr Hu said. "China needs to learn from the past: It invested heavily in Libya and Venezuela and lost a lot."

AGENCE FRANCE-PRESSE

A version of this article appeared in the print edition of The Straits Times on May 19, 2018, with the headline 'US sanctions on Iran may give China an edge'. Print Edition | Subscribe