China-Iran Relations have been the subject of much speculation after a draft of a 25 year partnership agreement was leaked in July 2020.

Some analysts have asserted that this deal is a result of US President Donald Trump’s maximum pressure campaign that is forcing Tehran into Beijing’s orbit to survive sanctions and weather the economic storm of COVID-19 and pushing China to abandon its long-standing policy of non-intervention in the Middle East.

But the reality is more complex and reflective of the balanced outgrowth of long-standing ties rather than a significant reorientation.

The leaked draft presents a framework for greater Iranian integration into Beijing’s Belt & Road Initiative (BRI). The agreement would see China invest US$400 billion into Iran’s oil, gas, petrochemical, transportation and manufacturing industry over a 25 year period in exchange for a discount in oil sales alongside military and strategic engagement.

China’s engagement in the Middle East has grown out of President Xi Jinping’s BRI. The region has benefited from Chinese investment as a strategic gateway and global transit point. China has signed five comprehensive strategic partnerships alongside 12 strategic partnerships with regional states, including Israel, promising strengthened commercial and economic ties.

China–Iran relations were elevated to a comprehensive strategic partnership level in 2016. Iran is considered geographically and strategically essential for the BRI. Bilateral relations are also historical, dating back centuries.

Ties have been further strengthened by reciprocal presidential visits in 2014, 2016 and 2018. Discussions on the partnership agreement supposedly began during President Hassan Rouhani’s 2014 visit to Beijing.

Unlike other stakeholders in the region, China’s strategy has been primarily economic believing that economic gains will bring greater stability to the region. This approach has enabled China to avoid taking sides in regional conflicts and has allowed Beijing to benefit from the US security presence in the region.

China’s increasing influence in the region presents an opportunity for Beijing to fill a vacuum at a time when regional states that have long relied on US security are more anxious about US security commitments.

Regional states have reoriented their energy and commercial trade from West to East over the past two decades. This shift took place due to Asia’s growing energy demand. Prior to the spread of COVID-19, China imported almost half of its energy from the region. In 2016, the Middle East saw the largest inflow of Chinese foreign direct investment.

Arab Gulf states like Saudi Arabia and the United Arab Emirates, among others, have benefitted from infrastructure investments in ports, rail links and refineries. Growing synergies in terms of arms sales and the development of an indigenous defence capacity is also in the works. China’s support for Saudi Arabia’s nuclear program is another example of Beijing’s balanced approach in helping Riyadh while also supporting Tehran.

China–Iran ties still remain challenged by Iran’s role in the region, the US withdrawal from the Joint Comprehensive Plan of Action (JCPOA) and the re-imposition of US nuclear-related sanctions. China was a facilitator and signatory of the nuclear agreement and continues to support the implementation of the deal.

China was also an economic beneficiary of the agreement taking advantage of numerous investment projects, including in Iran’s energy and infrastructure sectors. But the US withdrawal from the agreement in 2018 has added a US dimension to China–Iran relations.

The US maximum pressure campaign and sanctions have made Chinese investors cautious about engagement with Tehran. China has also been frustrated by Tehran’s regional activities, nuclear program and interventionist foreign policy that are seen as destabilising and deleterious to Beijing’s economic interests.

While Iran is strategically central to the BRI, it remains to be seen if new levels of commercial activity will strengthen the economic and political dimensions of the relationship.

Seeking greater Chinese economic assistance in light of US sanctions, Iran has developed a ‘look East’ policy that has been championed by Supreme Leader Ali Khamenei. As part of this strategy, Tehran has hoped that China will take advantage of lucrative investment opportunities in the absence of Western competition.

China was the largest buyer of Iranian crude oil and has also continued limited purchases, thereby protecting Iran from US sanctions.

But, in the climate of US pressure, large Chinese investment flows have been dampened and economic exchanges are nowhere near the levels that Iran expected or needs to see growth, employment and infrastructure investment. Beijing’s behaviour indicates that this agreement can only be successfully implemented if tensions between Tehran and Washington are reduced and sanctions removed.

Beijing is dangling the prospect of future economic benefits for Iran as an incentive for future negotiations.

Domestic concerns about this partnership with China have also emerged. Critics worry that Tehran’s overinvestment with China will create new dependencies for Iran when it has long tried to maintain a policy of non-alignment.

Policymakers have also articulated concerns that Beijing is exploiting Tehran’s current weakness. Iranian consumers have long expressed frustration over the poor quality of Chinese goods while Iranian merchants see cheaper Chinese products as pushing out Iranian products.

Against this backdrop, the appearance of stronger ties might be important as both Beijing and Tehran are facing tensions with Washington. The outcome of the US presidential election will have important consequences.

A Biden administration would likely return to the JCPOA and use its re-entry as an opportunity to reduce regional tensions through a dialogue process that would be supported by external players such as China.

A re-elected Trump administration will undoubtedly continue to pressure both Beijing and Tehran. Iran’s domestic issues and the complications of regional dynamics make clear that strategic hedging and regional balancing will continue to guide China–Iran relations.

Author: Sanam Vakil, Deputy Director & Senior Research Fellow in the Middle East and North Africa Programme, Chatham House.