Banking Restrictions Take Toll on China-Iran Trade

EghtesadOnline: China has been Iran's biggest trading partner and its export destination–although that position went briefly to Iraq in the second half of 2018– and Tehran continues to seek stronger ties with its "traditional ally."

News ID: ۷۴۶۸۱۷

02 March 2019

Majlis Speaker Ali Larijani traveled to China late last month at the head of an economic-political delegation. The two sides signed 17 documents that call for building closer collaboration in economic, industrial and judicial fields.

But the latest official trade figures show, two-way bilateral trade has suffered as a result of the fallout from US sanctions and Beijing’s compliance with the new restrictions.

According to customs data from China, exports to Iran in January hit $722 million – down 58.3% compared on the same month in the previous year. On the other hand, Iranian exports to the world’s second largest economy reached $1.012 billion, which was 51.90% lower year-on-year, Financial Tribune reported.

Tracking reasons for the decline, observers look at the gamut of factors including hurdles in Iran like stringent foreign exchange controls. But the main impediment has to do with banking restrictions that came to a head with the new and more hostile US economic restrictions.

Sino-Iran economic ties almost came to a halt soon after last November when the sanctions against Iran's key sectors, namely oil, banking and insurance sectors came into effect.

China’s Bank of Kunlun (the main conduit for Iran trade) officially resumed its transactions with Iran after a one-month break in December. But its scope of work fell short of what Iranian businesspeople had hoped for. The bank strictly abides by the US sanctions regime.

Bank of Kunlun Policy

In an official notice Bank of Kunlun sent to Iranian banks, it outlined a new Iran policy. It made clear that it would process "only humanitarian goods and non-sanctioned goods and services between Iran and China."

"We hereby inform your good bank that our bank is able to resume business cooperation with Iranian banks, which are not subject to secondary sanctions by OFAC," reads the text of the notice sent to Iranian lenders.

Bank of Kunlun was established in 2006 as a commercial city bank in Karamay. The bank was later selected by the government in Beijing as its main bank to process oil payments to Iran, shielding other banks from penalties under western sanctions between 2010 and 2015. The US Treasury sanctioned Kunlun in 2012 for conducting business with Iran.

"During the previous round of sanctions China tried to accommodate us and therefore Bank of Kunlun was set up by CNPC. But this time around because CNPC has made investments in America through various projects and over 70% of Kunlun's share belongs to CNPC, they are under pressure not to work with Iran and bank has decided to only handle humanitarian trade with Iran," Ferial Mostofi, the head of Investment Attraction Services Center at Tehran Chamber of Commerce says.

"However we should see how our oil sales to China will proceed because although America has given the country waivers they want these countries to minimize” their oil imports from Iran," Mostofi told the Financial Tribune.

The US in November granted waivers to eight major importers of Iranian oil and allowed some banks to process payments for Iran's humanitarian trade.

Another reason hurting Iran-China trade is the latter's strong compliance with anti-money laundering rules set by the inter-governmental body Financial Action Task Force.

The FATF Factor

"FATF is a global standard, which after 2007 after the 9/11 to curb financing of terrorism and money laundering they set some standards so that everyone will be committed to it and there's no breach of sensitive information [as domestic opponents claim]. Even if there were no sanctions, lack of compliance with FATF meant that no banks can work with us," she warned.

According to Mostofi, Kunlun has not yet said whether it will expand its relations beyond humanitarian goods with Iran. Recent talks that China had with an American law firm to see whether it can work with Iran in steel trade came to "naught."

About Larijani's China tour, Mostofi said they had some discussions and there is always hope. "We have to wait for the results."

She went on to say that "The Chinese are interested in working with us, but every country puts its own interests first. I've heard that some packages about oil exports were discussed during the meeting."

Mijid Reza Hariri, vice president of Iran-China Chamber of Commerce says FATF countermeasures against Iran has been a major factor behind the declining trade ties. But adds that "domestic controls" like import bans and forex restrictions are also to blame.

Asadollah Asgaroladi, president of Iran-China Chamber of Commerce confirmed to the Tribune that Kunlun is working with Iran. But said that that is limited to individuals who can "register a company there."

"China is a powerful country for example in their manufacturing base, but they need supervision because goods with varying degrees of quality are produced there," Mostofi said.