China recently signed a Comprehensive Strategic Partnership with Iran, an overarching agreement that strengthens economic and security cooperation between the two. The partnership is the second-highest level of bilateral relations for China, and its $400 billion investment agreement is making headlines. However, much of it may only be symbolic. It is highly unlikely that China can deliver on its investment pledge or even maintain a stable 25-year relationship with Iran.
First, $400 billion in Chinese investment over the next 25 years is unfeasible. Beijing promised investment across sectors including banking, transportation, healthcare, and communications in exchange for regular and heavily discounted oil supplies from Iran. But Chinese companies have to invest an average of $16 billion per year in Iran to make the target. In comparison, while large amounts of undisclosed spending are possible, China’s investment in Iran totaled $4.7 billion from 2005 to 2020, according to the China Global Investment Tracker (CGIT). Even the Chinese government’s numbers raise doubts. According to China’s Ministry of Commerce (MOFCOM), the cumulative stock of Chinese investment in Iran at the end of 2019 was barely over $3 billion.
Another concern is Beijing’s past record of delivering on high-value investments, particularly in the Middle East and West Asia. Large projects Chinese companies have promised Iran in the past failed because of financial disagreements, project delays, and US sanctions. The CGIT pegs the dollar value of failed Chinese investments in Iran at $25.9 billion, dwarfing realized spending.
The trend in China’s aggregate outbound investment also does not inspire confidence. According to MOFCOM, the only country to exceed $16 billion in annual flows even once was the US in 2016 at $17 billion. (MOFCOM assigns most Chinese outbound investment to Hong Kong.) The CGIT corrects for this, but even so, the only countries to ever reach $16 billion of Chinese investment in one year are among the world’s richest: the US five times and Switzerland, Britain, and Canada once. Moreover, the last time was 2017, which saw the end of this unsustainable spending spree. Chinese spending dropped for several years even prior to the COVID-19 pandemic. It will certainly recover in 2021-22, but there is little chance it will return to its peak for years to come.
Second, Chinese investment abroad oftentimes does not achieve the influence or the soft power boost Beijing would like to see. There are many instances of backlash against Chinese investments globally, and citizens of countries that initially welcomed Chinese investment often come to criticize unfair labor practices, environmental violations, and corrupt business practices as the foreign presence grows. In the almost certain case that the promised investment fails to materialize, Iranian public opinion may become dismissive of the partnership.
Finally, China will need to navigate the complex politics of the Middle East. China’s interests there are primarily energy-driven, as the Middle East is the largest source of China’s imported petroleum. The Chinese government has been careful not to alienate any Middle Eastern country and so far has avoided taking clear-cut policy positions in the region. However, this strategic ambiguity may not be sustainable as China gets more involved. For example, Beijing also has a comprehensive strategic partnership with Iranian rival Saudi Arabia. Chinese companies have significant activities in Saudi Arabia in and out of the energy sector. Iraq, China’s third-largest crude oil supplier, maintains a close relationship with Iran while other top suppliers (Kuwait, Oman, and the UAE) are in the Saudi camp to varying degrees. If the Iran-Saudi Arabia conflict intensifies, China may be forced to pick sides between two or more of its top 10 oil suppliers.
The announcement of the China-Iran Comprehensive Strategic Partnership is significant, but a successful long-term economic relationship between China and Iran is still very much in question. It would be foolish to take China’s investment promises at face value, and US policymakers need not overreact.