Energy Hunger Drives Beijing's Trade with Tehran

Gareth Smyth, The Financial Times:

From Jamshidieh park on the outskirts to the bustle of Imam Khomeini square in the centre, the Chinese are more and more visible in Tehran, the Iranian capital, even if their numbers do not yet rival those of Americans before the 1979 Islamic Revolution.

While China and Iran both dislike US global pre-eminence, they are struggling to take their economic co-operation beyond Iran's supply of energy. read more

Iran's $4bn exports to China in 2004, $3bn were crude oil, gas and oil products, said Lu Chang Jin, Beijing's economic and commercial counsellor in Tehran.

For China, Iran's reserves of 133bn barrels of oil and 27,500bn cubic metres of natural gas offer a tempting prize, especially with US companies barred by sanctions.

Meanwhile, Iranian strategists wonder whether they might produce an Islamic version of the Chinese model. China's authoritarian communist government has achieved surging growth by relaxing state control of the economy.

Outside oil, Chinese-Iranian trade is limited. Relations remain largely at government-to-government level, and on both sides political calculations play a big part.

At a crucial time in Iran's negotiations with the European Union over its nuclear programme, Li Zhaoxing, China's foreign minister, said last November that the issue should not be submitted to the United Nations Security Council as the US wanted.

But Iranians know Beijing's support goes only so far.

"China wants a closer partnership but is held back by its need for America, its biggest market," said Behzad Shahandeh, a Sinologist and politics professor at Tehran university.

China wants to be a global power and has a covert rivalry with the US, but for now China has accepted this is the American decade. People boast that Iran and China are great partners, but the volume of trade is peanuts.

Still, last year's trade worth $7bn, up from $1.3bn in 2000, is set to increase further under an agreement in principle for energy-hungry China to buy 10m tonnes a year of liquefied natural gas (LNG) over 25 years.

The gas would come from the offshore South Pars field, which Iran shares with Qatar but which it has developed at a slower pace than its Arab neighbour.

The deal, worth around $100bn, also gives Sinopec, the Chinese oil group, rights to exploit the Yadavaran field in south-west Iran, with reserves reported at 15bn barrels, on the "buy back" conditions disliked by big international companies.

Iranian officials insist China has the necessary expertise, but they are taking the precaution of involving a large company talks are under way with both Shell and Total in the field's development plan.

Away from the oil and gas fields, China has built three lines of the Tehran metro, some power stations, a highway from Tehran to the Caspian sea and a number of super oil-tankers.

Haier, the white-goods group, has opened a joint-venture $8m production line at Isfahan.

But Chinese direct investment remains low, as Chinese companies face the same difficulties as others in investing in Iran's bureaucratic economy.

Even the first Chinese-run restaurant in Tehran has hit problems. The Darband eatery, complete with waitresses in Chinese tunics and Islamic hijab, was closed after a month by the Amaken, the police who monitor public places for 'un-Islamic behaviour'.
There is also growing Iranian resentment at Chinese exporters undercutting domestic producers.

Around 50 per cent of Chinese exports are machinery, equipment and technology, but official figures underestimate consumer goods arriving unofficially, which are double those passing customs.

Iranian textile and footwear manufacturers, for instance, are in uproar. "The Iranians complain, but our response is "don't speak to us, speak to the Iranian importers'," said Mr Lu. "These are cheap goods made by China for Africa that somehow end up coming here."

The problem highlights the fact that 70 per cent of imports to Iran come either through smuggling or "unofficial" points of entry run by the Revolutionary Guards or other state agencies.

Tehran's frustration also illustrates its own failure to modernise its industry and marketing.

"The quality of Chinese technology is not giving us the edge we need," said Mr Shahandeh, referring in this instance to the metro lines.

"There are so many Chinese roaming around Iran, but what are they really contributing?"

Bijan Namdar Zangeneh, Iran's oil minister, promised in Beijing last year 'the greatest incentives', including tax exemptions, to Chinese companies in exploration and development.

Talks are also under way over a possible gas pipeline to China via India, or Pakistan and India. ...