China Wary of Giving In to U.S. on Iran

(WSJ)

BEIJING—U.S. Treasury Secretary Timothy Geithner is likely to get a skeptical hearing in Beijing on Tuesday and Wednesday as he presses leaders to reduce purchases of Iranian oil and explains tough new U.S. sanctions rules meant to hobble Iran's financial sector.

Chinese officials are wary about cutting off a major source of supply, as are their counterparts in Tokyo, which Mr. Geithner will visit after Beijing. In China's case, the issue is also overlaid with nationalist politics. It doesn't want to be seen as succumbing to increased U.S. pressure to punish another nation, particularly when the latest effort was driven by the U.S. Congress, not a new United Nations agreement.

Indeed, if the European Union goes through with plans to cut off oil imports from Iran, and China were one of its few big buyers left, Beijing could find itself in a strong position to wring commercial concessions from Iran on a series of oil-industry contract disputes. The U.S. and Europe have been trying to press Iran to scrap a nuclear-weapons program; Iran says it isn't developing such weapons.

"To the U.S., the Chinese will be passive-aggressive," says Patrick Chovanec, a business professor at Beijing's Tsinghua University. "They won't tell the U.S. they're not going along, but implicitly it will be 'You don't tell us what to do.' "

Vice Foreign Minister Cui Tiankai bluntly dismissed the new U.S. sanctions effort. "These issues cannot be resolved through sanctions," he said at a media briefing on Monday. "Negotiations are also needed to solve the issue."

President Barack Obama recently signed into law a measure he initially opposed that would bar from U.S. financial markets foreign financial institutions that do business with Iran's central bank, which plays a critical role in facilitating trade with Iran. One way for a nation to get an exemption is to show a "significant reduction" in Iranian oil imports. The law would increase pressure on Chinese financial institutions that finance Chinese business deals in Iran.

The administration says it won changes in the legislation before it became law to give it more flexibility. "We encourage everyone that trades with Iran to significantly reduce their oil imports," said a Treasury official.

U.S. officials say China has been abiding by the requirements of U.N.-approved sanctions, but they have been trying to encourage Beijing to go further by—among other things—instructing Chinese banks not to deal with any Iranian counterparts engaged in the country's weapons program.

Even before the new law, Washington believed that China's largest banks were becoming increasingly cooperative with U.S. sanctions efforts. But Washington is still concerned that Iran is seeking new "access points" to international finance through smaller banks in Hong Kong and mainland China.

In September, David Cohen, the undersecretary for terrorism and financial intelligence, visited China and Hong Kong to persuade local officials and bankers to help strengthen the sanctions against Iran and North Korea. Since then other U.S. officials have had discussions on sanctions with Chinese oil companies and Chinese government agencies.

In 2011 through Nov. 30, China's oil imports from Iran rose roughly 30% from the year-ago period. China imports about 11% of its crude oil from Iran, making Iran its No. 3 supplier after Saudi Arabia and Angola.

Since December, though, exports have begun to fall compared to a year earlier. Industry analysts doubt that's the result of U.S. pressure. Rather, negotiations between China United Petroleum & Chemicals Co, known as Unipec, and the National Iranian Oil Co., over commercial issues have dragged on longer than expected, they say.

But U.S. pressure may have played a role in China slowing down the pace of investment in oil and gas projects. Chinese oil firms are concerned about being hit by U.S. sanctions, say energy executives in Beijing. Even so, the more isolated Iran becomes economically, the more leverage Beijing may have in its various disputes with Iran. In 2010, China was Iran's largest oil import market, according to the U.S. Energy Information Administration, with Japan No. 2.

China is caught between its extensive commercial relations with Iran and its need to keep strong ties to the U.S. economy, said Pang Zhongying, director of Nankai University's Institute of Global Studies. "China has no choice but to prepare for the worst and try to avoid Chinese losses" in the U.S.-Iran showdown, he said.

Appearing to give in to the U.S. would play poorly at home for Chinese officials. "It will only take a few years before China is faced with zero oil," said a posting on an online forum of People's Daily, the Communist Party's newspaper. "By that time, the U.S. and EU will be strangling us."

Mr. Geithner's visit will mark a rare opportunity to discuss the issue with the two men who are expected to spearhead the new leadership of the Communist Party following a once-a-decade power transition beginning later this year.

On Wednesday, he is expected to meet Vice President Xi Jinping, the man due to take over as party chief in October or November this year, as well as Vice Premier Li Keqiang, who is widely expected to become premier after the leadership change.

U.S. officials are keen to gain to as much access as possible this year to the two men, about whom little is known outside the party elite. Mr Geithner's visit will also allow both sides to discuss preparations for Mr Xi's expected visit to the U.S. later this year, probably in February.