China’s Investments in Iranian Economy Surge

EghtesadOnline: China is financing billions of dollars’ worth of Chinese-led projects in Iran, making deep inroads into the economy while European competitors struggle to find banks willing to fund their ambitions.

News ID: ۷۸۰۸۲۰

13 December 2017

Freed from crippling nuclear sanctions two years ago, Iran is drawing unprecedented Chinese funding for everything from railroads to hospitals. Chinese state-owned investment arm CITIC Group recently established a $10 billion credit line and China Development Bank is considering $15 billion more.

“They (western firms) had better come quickly to Iran, otherwise China will take over,” said Ferial Mostofi, the head of the Iran Chamber of Commerce’s Investment Commission, speaking on the sidelines of an Iran-Italy investment meeting in Rome, Reuters reported.

The Chinese funding, by far the largest statement of investment intent of any country in Iran, is in stark contrast with the drought facing western investors since US President Donald Trump disavowed the 2015 pact agreed on by major powers, raising the threat of reimposing sanctions, Financial Tribune reported.

Iranian officials say the deals are part of Beijing’s $124 billion Belt and Road initiative, which aims to build new infrastructure—from highways and railroads to ports and power plants—between China and Europe to pave the way for trade expansion.

A source in China familiar with the CITIC credit line, which was agreed on in September, called it “an agreement of strategic intent”. The source declined to give details on projects to be financed, but Iranian media reports have said they would include water management, energy, environment and transport projects.

An Iranian central bank source said loans under the credit line would be primarily extended in euros and yuan.

The China Development Bank signed a memorandum of understanding for $15 billion, IRNA reported on Sept. 15.

The bank itself declined to comment, in line with many foreign investors and banks, including from China, who were reluctant to discuss their activities in Iran for this story. The websites of banks and companies often carry little or no information on their Iran operations.

Call for Sovereign Guarantees

With a population of 80 million and a large, sophisticated middle class, Iran has the potential to become a regional economic powerhouse. But with the risk of sanctions hanging in the air, more and more foreign investors want Tehran to issue sovereign guarantees to protect them in case the projects are halted.

Economic ties between Iran and Italy, its biggest European trade partner, have been affected. Italy’s state-owned rail company, Ferrovie dello Stato, is a consultant in the building of a 415-km (260-mile) high-speed north-south rail line between Tehran and Isfahan via Qom by state-owned China Railway Engineering Corp.

The Italian firm is separately contracted to build a line from Qom to Arak, but it needs €1.2 billion in financing. Though backed by the state’s export insurance agency, it says it needs a sovereign guarantee.

“We are finalizing the negotiations and we are optimistic about moving forward,” said Riccardo Monti, chairman of Italferr, the state firm’s engineering unit, adding that the financing should be finalized by March next year.

Prime Minister Matteo Renzi’s promise in Tehran last year to oil the wheels of trade with a €4 billion credit line from Italy’s state investment vehicle is effectively dead, a source in Italy familiar with the matter said.

Cassa Depositi e Prestiti risked losing the confidence of its many US bond-holders who could sell down their holdings if the credit line went ahead, the source said.

A few European banks have deepened trade ties with Iran this year—Austria’s Oberbank inked a financing deal with Iran in September.

South Korea has also proved a willing investor, with Seoul’s Eximbank signing an €8 billion credit line for projects in Iran in August, according to Chinese state news agency Xinhua.

Time to Act

But China is the standout.

Valerio de Molli, the head of Italian think tank European House Ambrosetti, reckons China now accounts for more than double the EU’s share of Iran’s total trade.

“The time to act is now, otherwise opportunities nurtured so far will be lost,” de Molli said.

Iranian officials attending this week’s meeting in Rome sought to goad European firms and their bankers into action by talking up the Chinese financing and investments.

“The train is going forward,” said Fereydoun Haqbin, director general of economic affairs at Iran’s Foreign Ministry. “The world is a lot greater than the United States.”

Some Iranian officials remain concerned that investment could become lopsided and are looking at creative ways to maintain investment links with the West, however.

The Iranian commerce chamber is encouraging western firms to consider transferring technology as a way of earning equity in Iranian projects rather than focusing on capital.

“It was also seeking approval to set up a €2.5 billion offshore fund, perhaps in Luxembourg, as an indirect way for foreigners to invest in Iran, especially small- and medium-sized Iranian enterprises,” Mostofi said.

“The fund would issue the financial guarantees that foreigners want in return for a fee, effectively stepping in where banks now fear to tread. Most of the fund’s capital would come from Iran.”

For now, however, big western firms remain stuck.

Italian power engineering firm Ansaldo Energia, controlled by state investor CDP and part-owned by Shanghai Electric Group, has been in Iran for 70 years.

Its chairman, Giuseppe Zampini, said at the Rome conference there were many opportunities for new contracts but his hands were tied for now, partly because Ansaldo bonds were also in the hands of US investors.

“My heart says that we are losing something,” Zampini said.