China-Iran Upgrade Their ‘Comprehensive Strategic Relationship’ | Gordon G. Chang

Chinese President Xi Jinping just wrapped up his three-nation tour to the Middle East with a visit to Iran.
The global narrative is that Beijing and Tehran are strengthening relations and for good reason: during the visit the two sides inked 17 accords, treaties, and letters of intent.

The two republics—one “People’s” and the other “Islamic”—also declared they had agreed, in the words of the official Xinhua News Agency, “to elevate their ties to a comprehensive strategic partnership.” And they appear to have meant it. As Xi’s Iranian counterpart Hassan Rouhani said on Saturday, “Today we discussed the strategic relationship between both countries, setting up a comprehensive 25-year plan and also promoting bilateral relations of up to $600 billion over the next 10 years.”

Xi and Rouhani may have big plans, but with respect to the economic dimension, China just might not be the partner Iran envisions. Tehran, for instance, is looking to China, already the biggest purchaser of its crude oil, to buy even more of it. Now that sanctions on such sales have been lifted, Iran wants the Chinese to buy most of its extra output of 500,000 barrels a day.

All projections show that China’s oil needs will grow substantially over time, but that may not end up being the case. In fact, virtually all analyses of the Chinese economy from the beginning of last year have proved overly optimistic. Yes, last year the country’s crude oil imports rose 8.8 percent, but that does not appear to have been due to the needs of a growing economy or consumer demand. Reuters calculates China’s implied oil consumption increased only 2.5 percent last year. In 2015, the country consumed about 10.3 million barrels per day..

Why are imports rising far faster than consumption? For one, China is increasingly refining imported crude oil and selling it abroad. The more important reason, however, is that Beijing is taking advantage of low prices to add to its strategic petroleum reserve. In December, the official National Bureau of Statistics reported that by the middle of 2015 the reserves had reached the 191-million-barrel mark, well above the 91 million barrels announced in November 2014. So, a significant portion of China’s purchases had little to do with current demand.

China still has a long way to go before it tops out its storage tanks and caverns. The country has announced a reserve target of 550 million barrels by 2020. Therefore, Beijing will continue to buy oil from Iran and others .

Nonetheless, Iran’s high expectations for a rewarding economic relationship with China may not materialize – as an increasing number of China’s trading partners, particularly in the developing world, are learning. The main reason is that China’s manufacturing sector is slowing dramatically — as is its economy as a whole (some estimates say the economy grew at 1 percent last year, not the government’s reported 6.9 percent).

Further downward pressure on the demand for oil is being driven by China’s pollution problems, which are forcing local governments across the country to pull vehicles off the road. In addition, China is increasing efforts to get more energy from nuclear power and renewable sources. These combined trends will conspire to further reduce China’s energy consumption. And one final point: Beijing, currently spending dollars at an alarming rate to defend the renminbi, may not have the cash to make massive energy purchases to fill its strategic reserve.

As Beijing and Tehran continue to challenge the international order, and especially America’s role in it, both have geopolitical reasons to strengthen ties in fundamental ways, but their economies may not mesh as easily as their leaders now think. Iran’s mullahs might want to hedge their oil bets.

Source: http://www.worldaffairsjournal.org/blog/gordon-g-chang/china-iran-upgrade-their-comprehensive-strategic-relationship%E2%80%99