Fueling the Dragon’s Flame: 

How China's Energy Demands Affect its Relationships in the 

Middle East 

By 

John Keefer Douglas 

Matthew B. Nelson 

Kevin Schwartz 

Presented to 

U.S.-China Economic and Security Review Commission 

In fulfillment of Contractual Obligations 

September 14, 2006 
Acknowledgements 

A topic as important as China’s relationships in the Middle East deserves to be studied, and so 

we must acknowledge first and foremost the U.S.-China Economic and Security Review 

Commission, which awarded us the contract to study this vital issue. The Commission's 

Research Working Group has provided plenty of support and accommodation. Second, this 

analysis could not have been completed without the dedicated work of our team of primary 

source, foreign language researchers, who included Amgad Naguib, Elias Sayegh, Abeer A. 

Mohammad, and Reddy Xiao. Finally, Professor Alan Wachman of The Fletcher School 

deserves our thanks. Without his support and encouragement, we would never have submitted 

our proposal, let alone this document. 

-K. Douglas, M. Nelson, and K. Schwartz
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1 U.S.-China Economic and Security Review Commission

Table of Contents

1. Introduction 2 

2. The Demand for Oil in China 3 

3. China and Iran 5 

4. The Shanghai Cooperation Organization 10 

 4.1 Differing Goals 11 

 4.2 The Role of Energy in the SCO 12 

 4.3 Interests 14 

5. China and Saudi Arabia 15 

6. Xinjiang: A Potential Flashpoint 18 

7. Assessment of Chinese Strategy and Policy 19 

7.1 Chinese Energy Policy 20 

8. Implications and Recommendations for the United States 22 

Appendix: Chinese Security Policy and the Military 

Dimension of the SCO 26 

Sources 28
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1. INTRODUCTION 

As a major oil consumer, the People’s Republic of China (PRC) has turned outward, cultivating 

bilateral relationships with states that can literally fuel China’s rapidly growing economy. This 

paper deconstructs China’s foreign policy towards supplier states in the Middle East—especially 

Iran and Saudi Arabia— in an effort to assess China’s grand energy strategy. It rejects the view 

that China can successfully pursue a “neo-mercantilist” strategy of securing reserves. It will 

evaluate whether China’s “no strings attached” commercial relationships with unsavory regimes 

threaten global security. Finally, it will consider the strategic challenge posed to the U.S. by the 

emergence of China in the Middle East. The paper concludes that a policy of active engagement 

and support for China’s increasing diversity of energy sources can help prevent harm to U.S. 

economic interests. It can also constrain China’s incentive to take bilateral relations with energy 

suppliers to the level of security guarantees, which would challenge U.S. military supremacy in 

the region. 

China’s disregard for the human rights abuses and other violations of international norms by oil 

supplying states such as Sudan and Iran, and its opposition to the imposition of sanctions by the 

UN on these states, has prompted some western powers to criticize the PRC for exploiting what 

has been termed the ‘morality gap’. The PRC’s uncritical engagement of Syria, Iran, and Sudan 

has raised questions about Beijing’s ability to be, in the words of Former U.S. Deputy Secretary 

of State Robert Zoellick, a “responsible stakeholder.”1

 Indeed, so long as Beijing pursues 

commercial interactions without regard to the odious behavior of its foreign partners, it will be 

perceived in some quarters as defying international moral standards and contributing to 

instability and lawlessness. 

Nowhere is this issue now more apparent than in relations between China and Iran. China and 

Iran first became strategically aligned as a result of Chinese arms sales in the 1980s. The two 

countries share a similar narrative as historically great civilizations whose progress toward 

modernity was retarded by Western infringement, but the friendship is also built on commercial 

interests and a mutual commitment to a multi-polar world to blunt U.S. influence. Iran views its 

friendship with China as vital to its continued ability to resist pressure from the West and endure 

sanctions. It has worked to expand its relationship with China to include military assurances, for 

which China has shown little interest. China views Iran as an important partner in China’s plans 

to develop overland routes to transport oil from the Middle East. Moreover, a strong partnership 

with Iran has enhanced China’s capacity to become an important player in Middle Eastern affairs. 

Although China recognizes its relationship with Iran may cost it international prestige and 

threaten Sino-U.S. relations, it has thus far shown unusual willingness to support Tehran. 

A new element in the Sino-Iranian relationship is the emergence of the Shanghai Cooperation 

Organization (SCO), to which China is a member and Iran is an official observer. The SCO is 

the most public forum where Iran and China have the opportunity to work toward common 

economic, political, and military goals. Understanding the SCO’s rapid emergence is vital to 

 

1 Zoellick expanded on this point, saying “China should take more than oil from Sudan – it should take some 

responsibility for resolving Sudan’s human crisis.” Robert B. Zoellick, Deputy Secretary of State, “Whither China: 

From Membership to Responsibility?: Remarks to National Committee on U.S.-China Relations,” New York City, 

September 21, 2005. 
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3 U.S.-China Economic and Security Review Commission

assessing Sino-Iranian relations. This partnership of states is working to build energy and 

military cooperation in Central Asia and has also emerged as a forum to express opposition to 

American influence. Although some experts have asserted that this group could evolve to be as 

militarily significant as NATO and as energy dominant as OPEC, there are a number of barriers 

that make such a result unlikely. 

China’s partnership with the House of Saud is far more recent, as Saudi Arabia was one of the 

last countries in the Middle East to establish diplomatic ties with China, in 1990. Relations 

between the two countries remained cool through most of the 1990s. Bilateral ties have been 

strengthened considerably since then, with China emerging as an important buyer of Saudi oil, a 

willing investor in joint production and refining projects, and a supplier of arms and ammunition. 

To the Saudis, China's growing demand for oil and lack of attendant political pressure is an 

attractive hedge against their traditional reliance on the U.S. market. China, in turn benefits from 

supply source diversification and the reliability of Saudi production. While strengthening 

relations between these two states may allow Saudi Arabia to distance itself somewhat from the 

U.S., it is less likely to have any lasting strategic impact on U.S. interests in the region. U.S. oil 

imports from Saudi, and more importantly U.S. naval supremacy in the region, will not be 

challenged by China. Moreover, the closer China is to Saudi Arabia, the more pressure Chinese 

leaders will be under to moderate their support of Iran. 

China has shown no interest in exploiting the political leverage it might have to influence the 

policies of Iran, Syria, and Saudi Arabia. During his 2006 visit to the United States, President 

Hu Jintao reportedly defended his country’s disinterest in pressuring its partners by explaining 

that the PRC is focused on its own internal reforms and construction and does not wish to 

distract itself by meddling in the affairs of other states.2

 The PRC is adamant about the 

inviolability of sovereignty. By standing for such a principle when other states are at issue, 

China calculates that those states will refrain from supporting interventionist policies if ever the 

PRC is the focus of international opprobrium. However, as the confrontations over human rights 

violations in Sudan and nuclear weapons in Iran continue, the PRC may find itself less able to 

avoid taking a stance on matters of international concern. 

2. THE DEMAND FOR OIL IN CHINA 

Driven by unprecedented growth of the Chinese industrial, petrochemical, and manufacturing 

sectors — all of which are oil-intensive, and the rapid expansion in the use of the personal 

automobile, the PRC passed Japan to become the world’s second largest consumer of oil in 

2004.3

 The U.S. Department of Energy estimates that China will consume 7.4 million barrels per 

 

2

 Joe Kahn, “In Private Candor From China, An Overture to Promote a Thaw,” The New York Times, April 17, 2006. 3 As recently as 1990, the PRC had only one million cars on its roads. By 2005, the Chinese people drove 12 million 

cars, and the Chinese government predicts that 4 million new cars will be sold in 2006. In Comparison, U.S. 

consumers purchase 12-18 million cars per year. Most replace existing cars and negligibly impact fuel 

consumption. Furthermore, with only 8 vehicles per 1,000 residents, the PRC has a highly underdeveloped 

transportation sector; transportation fuels consumption is forecast to quadruple between 1995 and 2015. Yves 

Engler and Bianca Mugyenyi, “China's cars on road to ruin?” People and the Planet, June 7, 2005; Embassy of the 

People’s Republic of China to the United States, “Auto sales expected to hit 4 mln units in '06,” April 10, 2006. 

http://www.china-embassy.org/eng/xw/t245422.htm; E. Iain McCreary and Alan Y. Gu, “China’s Energy: A 
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4 U.S.-China Economic and Security Review Commission

day in 2006, representing nearly a half million barrels per day increase from 2005.4 By 2025, 

China’s consumption is forecast to increase to 14.2 million barrels per day.5

If the PRC could meet its rapid increase in oil demand by exploiting domestic reserves, oil would 

not be a major factor in Chinese foreign policy. Until 1992, China was a net exporter of oil, but 

domestic production potential has been largely exhausted and production has not increased with 

demand.6 The gap must be met by imports, which, at 3.6 million barrels per day, currently 

represent approximately 50 percent of consumption. By 2025, imports are forecast to more than 

triple to 10.9 million barrels a day, and will exceed 70 percent of total consumption.7

 

Furthermore, more than 50 percent of current imports travel through the Straits of Malacca, one 

of the least secure shipping lanes in the world, and the PRC lacks the naval power to defend 

these straits against an economic blockade.8

 Thus, the PRC’s oil demand has become a strategic 

liability. 

Faced with the challenge of meeting a voracious appetite for oil, the PRC has worked to 

diversify its supply. It has tried to develop an Asia-based, regional capacity for oil production 

that makes it less dependent on international shipping, and its oil firms have become major 

players in African energy development.9 The fruit of this investment appears to have paid off, as 

Angola has reportedly surpassed Saudi Arabia as China’s largest oil supplier in 2006.10

China's oil imports from Kazakhstan more than doubled in the first four months of 2006, 

compared with the same period in 2005. Crude imports from Russia climbed 36 percent during 

the same period, making the country China's fourth-biggest oil supplier.11

Despite aggressive pursuit of supply diversity, as much as 70 to 80 percent of China’s future oil 

imports will have to come from the Middle East and North Africa.12 China’s three major state 

 Forecast to 2015,” Published by the Los Alamos National Laboratory for the U.S. Department of Energy (LA-UR96-2972), September 1996. http://www.lanl.gov/source/orgs/d/d4/energy/docs/china.summary.pdf 4

 “China Country Analysis Brief,” Energy Information Administration, U.S. Dep. of Energy, August 2006. 

5

 Charles Esser, “China Country Analysis Brief,” Energy Information Administration, U.S. Department of Energy, 

August 2, 2005. 

6 For instance, despite increasing demand, production in Daqing, the nation’s most productive field, fell five percent 

in 2004. Esser. 7

 Esser; also “China Country Analysis Brief,” August 2006. 8

 Emma Chanlett-Avery, “Rising Energy Competitition and Energy Security in Northeast Asia: Issues for U.S. 

Policy,” Congressional Research Service, Washington, DC, January 20, 2006; also see “Mapping the Global Future: 

Report of the National Intelligence Council’s 2020 Project,” National Intelligence Council, December 2004. 

http://www.foia.cia.gov/2020/2020.pdf 9 In the first 10 months of 2005, Chinese companies invested a total of $175 million in African countries, primarily 

on oil exploration projects. In Sudan, China National Petroleum Company (CNPC) invested in a pipeline project 

and in 2005 bought 50 percent of Sudan's oil exports, which accounted for five percent of China's oil needs. In 

Angola, which exports 25 percent of its oil to the PRC, the Chinese have gained access to oil resources by offering a 

$2 billion aid package that will fund Chinese construction of schools and infrastructure. Tan Jin San, “Race for 

more oil fuels China's power game; Search on for more energy sources as far away as Africa as economy burgeons,” 

The Business Times Singapore, April 11, 2006. 10 “China Country Analysis Brief,” Energy Information Administration, U.S. Dep. of Energy, August 2006. 

11 Gordon Fairclough, “Iran Lobbies China, Russia to Help Curb U.S.; At Summit in Shanghai, Tehran Plays Its Oil 

Card In Push to Forge Alliance,” Wall Street Journal, June 16, 2006. pg. A.4 
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5 U.S.-China Economic and Security Review Commission

owned oil companies – CNPC (Petrochina), China Petrochemical Corp (Sinopec), and China 

National Offshore Oil Corp (CNOOC) – have invested significantly in the Middle East. 13 For 

example, in 2004, Sinopec outbid most of the American oil majors for the right to develop a new 

oil field in Saudi Arabia.14 More recently, CNPC partnered with an Indian firm to buy a 

significant stake in one of Syria’s few oil fields.15

Three years ago, the head of China's National Reform and Development Commission (NDRC) 

and Iranian oil minister Bijan Namdar Zanganeh signed a memorandum of understanding 

regarding bilateral energy cooperation which included Chinese development of Iranian oil 

fields.16 In 2006, Sinopec reportedly signed an agreement with Iran to jointly develop the 

Garmsar oil block, one of 16 oil blocks that Iran offered for international tender in 2003.17 Iran 

is China’s third largest oil supplier according to Chinese figures. 

Iranian and Saudi exports together now represent almost two-thirds of China's Middle East oil 

imports, meaning that relations with these two countries are of crucial importance. Chinese 

imports from other countries have also expanded, but partnerships with Saudi Arabia and Iran 

have increased even faster. Whereas in 1994, Iran accounted for just one percent of China's total 

imports, a decade later, Beijing purchased 13 percent of its oil from Tehran.18

 

3. CHINA AND IRAN 

China and Iran first established diplomatic relations in 1971. Though the two nations have both 

experienced revolutionary change in the intervening decades, their continued relationship 

demonstrates that both countries value political pragmatism, strategic imperatives, and economic 

trade above discrepancies in ideology and religion. China views Iran as a regional power, whose 

strategic location and economic importance will remain steadfast in the years to come. However, 

in the face of protracted international concern over Iran’s nuclear program, how far will China go 

in protecting such strategic, political, and economic benefits? Is China willing to support Iran’s 

nuclear ambitions at the potential risk of jeopardizing Sino-U.S. relations and international 

prestige as a “responsible” power? 

In the 1970s, when China viewed Iran as an outpost of U.S. imperialism, the PRC sought to 

engage the Shah in an effort to stem the greater perceived threat of Soviet social-imperialism. 

 12 Wu Lei, “China-Arab Energy Cooperation: The Strategic Importance of Institutionalization,” Middle East 

Economic Survey, Volume XLIX, Number 3, 16 January 2006. 13 All three firms held initial public offerings between 2000 and 2002, and western oil giants ExxonMobil, Shell, and 

BP all purchased significant minority stakes. However, the PRC remains a majority stakeholder in all three, and 

the government still controls the retail fuel market. All three firms have significantly reduced their workforce, but 

CNPC runs much like a ministry of government. 

14 Steven Mufson, “As China, U.S. Vie for More Oil, Diplomatic Friction May Follow,” The Washington Post, April 

15, 2006. 

15 Mark O'Neill, “CNPC aims to double overseas crude output by 2010; China's growing dependence on imports 

heightens need for alternative sources,” South China Morning Post, February 13, 2006. Pg. 2. 16 Jill McGivering, “Iran crisis a dilemma for China,” BBC News, January 17, 2006. 

http://news.bbc.co.uk/1/hi/world/middle_east/4621182.stm 17 “China's Sinopec Signs a Deal To Develop Oil Block in Iran: Report” Hong Kong AFP, Compiled and distributed 

by NTIS, US Dept. of Commerce. 

18 Jin Liangxiang, “Energy first (China and the Middle East)” Middle East Quarterly 12.2 (Spring 2005): 3-11. 
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Unwilling to see Iran fall under the Soviet sphere of influence, China reasoned that assisting a 

U.S. proxy, something the PRC up to that point was loathe to do, far outweighed the cost of nonengagement. For Iran, a closer relationship with China also proved beneficial. First, the Shah, 

like China, viewed the Soviet Union as the primary threat to his power. Second, a closer 

relationship with China could eventually provide the Shah with another outlet for purchasing 

advanced technology and armaments in his quest to modernize Iran’s industry and military. 

Third, if ever U.S.-Iran relations were to collapse beyond repair, a close relationship with China 

could prove to be a valuable hedge.19 

With the establishment of the Islamic Republic of Iran, Sino-Iranian relations briefly soured; 

CCP Chairman Hua Guofeng had visited Iran and supported the Shah as late as August 1978. 

But by the early 1980s, in the midst of the Iran-Iraq War and increased international isolation, 

Iran had put aside any ill-will harbored toward China for supporting the Shah in order to secure 

Chinese weaponry. Iran would greatly value Chinese support during the Iran-Iraq War, a time 

when most all other countries in the Middle East (and in the West) supported Iraq. 

An improved relationship with a regional power like Iran provided China with economic and 

political benefits. Arms sales to Iran allowed China to improve its domestic arms industry 

during the early stages of its economic liberalization process, and China soon began to sell arms 

to the wider Gulf region.20 Politically, China gained leverage by assisting Iran during its most 

dire hour, when it had few others to turn to for advanced weaponry. 

China also assisted Iran in the field of nuclear technology, which not only gained China 

increased prestige in Tehran, but also demonstrated to the world that China was now to be 

regarded as among the major players in Middle Eastern security. According to a 2003 CIA 

unclassified report, China committed to discontinue its nuclear cooperation with Iran in 1997 and 

pledged to end its ballistic missile assistance to all countries in 2000. Both actions resulted from 

U.S. pressure; however, cooperation between Iranian and Chinese entities in both areas may 

remain.21 

The Chinese decision to maintain close relations with Iran throughout the 1980s was a 

consequence of the PRC’s new reading of the international system. As Soviet projection of 

power began to wane, China recognized that the gravest threat to its security and stability in the 

Middle East would be the preeminence of a singular hegemon, the United States. According to 

John Calabrese the early 1980s marks “the gradual unraveling of the Sino-U.S. “strategic 

partnership” and not coincidentally also marks the point of divergence between China’s Gulf 

policy and U.S. Gulf policy.”22 

 

19J. Brandon Gentry, “The Dragon and the Magi: Burgeoning Sino-Iranian Relations in the 21st Century,” The 

China-Eurasian Forum Quarterly, November 2005, 113. 20 During the last half of the 1980s, Chinese arms sales to Iran, Iraq, and Saudi Arabia (its three largest Gulf 

costumers) was approximately $3.9 billion. John Calabrese, “Peaceful or Dangerous Collaborators? China’s 

Relations with Gulf Countries,” Pacific Affairs, Vol. 65 No. 4 (Winter, 1992-1993), 473. 21Central Intelligence Agency, “Attachment A Unclassified Report to Congress on the Acquisition of Technology 

Relating to Weapons of Mass Destruction and Advanced Conventional Munitions: January-June 2003,” 

https://www.cia.gov/cia/reports/721_reports/jan_jun2003.htm#17. 22Calabrese 474. 
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In 1990, bilateral trade between China and Iran totaled approximately $314 million, but by 2003 

it had reached $5.6 billion.23 The Iranian press asserts that trade reached $29 billion in 2005, and 

that Iran's imports from China increased by more than 360 percent from 2000 to 2005.24 While 

arms remain an element of this trade, between 1993 and 2004 China's average share of the 

Iranian arms market was only 18 percent; Iran purchased most of its weaponry from Russia.25 

The rapidly growing trade relationship between Iran and China primarily results from China’s 

expanding demand for Iranian oil. 

The persistence and expansion of Sino-Iranian relations in the 1990s and the early 21st century 

should indicate that both countries share a desire for long-term partnership and value the other’s 

importance as an economic, strategic, and political ally.26 While the relationship is driven by the 

sale of Iranian oil and China’s military and (at least until 1997) nuclear assistance to Iran, SinoIranian relations, at a more fundamental level, are grounded in a mutual worldview. As John 

Garver points out in China and Iran, both China and Iran recognize the other as a one-time 

global power with a rich history that contributed enormously to the progress of civilization.27 

They see Western imperialism or infringement in their internal affairs as having retarded their 

progress as nations.28 Consequently, both have maintained a steadfast commitment against 

infringement in a country’s internal affairs. Put simply, China and Iran have convinced one 

another of their commitment to a multi-polar world and anti-hegemonistic struggle. 

As a result, the two countries have developed a sense of trust, exemplified in this statement by 

former Iranian ambassador to China, Fereydoun Vardinejad, during the debate over Iran’s 

nuclear program: 

Iran showed that under these sensitive conditions it is not alone and has many 

friends. Iran’s nuclear case is the symbolic manifestation of the common views of 

Iran and China in international and political relations. Tehran and Beijing both 

believe that unilateralism on the world level is not in the interest of countries and 

the world economy.29

 

23 This level of trade does not put Iran in China’s top ten trading partners. Gentry, p. 114-115. 24 “Iran press: Commentary says Tehran-Beijing in a ‘mighty alliance,’: Text of commentary by Azadeh Eftekhari 

by Iranian newspaper Sharq website,” August 19, 2006. Translated from Persian by BBC Worldwide Monitoring, 

August 22, 2006. 

25 Rory Miller, “China has more reasons than ever to enter Middle East debate,” The Irish Times, September 5, 2006. 26 Former Chinese Ambassador to Iran (and current Middle East special envoy) Sun Bigan said, “Over the past 30 

years, especially since the establishment of the Islamic Republic, Chinese-Iranian relations have developed 

substantially in all areas.... ...but neither [country] is satisfied with the status quo, we see the potential for even 

closer ties in many areas.” World Service of Islamic Republic of Iran Broadcasting Website (IRIB), 2001 (interview 

with an unnamed Iranian reporter). http://chinese.irib.ir/caifang/dashi.htm. Translation by John Keefer Douglas. 27See, for example, Song Rong and Bai Jie. “(PRC-foreign exchange) special interview: Rebuild the Silk Road, erect 

bridge of peace, security for Asia—interview with Iranian ambassador to China Fereydun Verdinezhad,” Xinhua 

(New China News Agency), 14 June 2005. From “Iranian Envoy to China Interviewed on Bilateral Ties,” Global 

News Wire- Asia Africa Intelligence Wire, BBC Monitoring/BBC, June 15, 2005. 28John W. Garver. China and Iran: Ancient Partners in a Post-Imperial World. (Seattle and London: University of 

Washington Press, 2006). See Chapter 1, “The Spirit of Sino-Iranian Relations: Civilization and Power. 

29Iran: Iran’s Ambassador to China Says Iran, China to Have Long-Term Cooperation, Tehran Sharq, December 21, 

2004 (FBIS). 
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8 U.S.-China Economic and Security Review Commission

Iran views China as a powerful ally among the world’s leading nations-- a country that because 

of a shared interest in stemming the dominance of the United States will advocate on its behalf. 

Iran hopes that its relationship with a global economic powerhouse like China will attract 

business from other countries wary of Iran’s pariah status. China, however, with its export-led 

economy that shipped $762 billion worth of goods in 2005 and its deep integration into the 

global economy, is far more willing to live with the reality of U.S. dominance than Iran.30

Furthermore, Iran has looked to China (as well as Russia) to counter the call in the United 

Nations Security Council, and elsewhere, for economic sanctions in response to Iran’s nuclear 

program. According to Iran, what is good for the Islamic Republic is also in the best interest of 

the PRC. As an editorial in Iran’s conservative leaning Shoma put it, “any cooperation China 

enters in security, political, economic sectors with the region’s leading nations like Iran and 

Saudi Arabia that supply China’s energy as well would represent a great victory for Chinese 

politicians over their Western counterparts.”31 

While such a position is by no means uniform, many Iranian editorials on the subject have 

echoed similar claims, going so far as to warn China and Russia that their economic and political 

livelihood in the Middle East depend on defying international pressure against Iran.32 The 

reformist daily Aftab-e Yazd plainly laid out the quid pro quo, stating that since “we have assured 

China that its energy and oil needs will be met, we should ask that country to complete its 

position and go beyond mere expressions of opposition to the referral of Iran’s dossier to the 

Security Council.”33 

But Iran is unwilling to question the strength of Sino-Iranian relations. Even in the face of 

current Security Council pressure, this Iranian belief stems from two main reasons. First, Iran 

recognizes that potential Security Council action has thus far been lukewarm in advocating for 

sanctions. If sanctions against Iran’s oil exports ever did become a major issue, Iran strongly 

believes that, in the end, China would prevent their implementation. Indeed the same day that 

Iran was given a one-month deadline to end uranium enrichment or face possible sanctions, 

China’s head of central planning, Ma Kai, was in Tehran trying to finalize plans for Sinopec to 

develop Iran’s rich Yadavaran oil-field. Second, Iran recognizes that there is little value in 

criticizing Sino-Iranian relations. For better or worse, China is Iran’s best supporter available. 

The current Iranian government of Mahmoud Ahmadinejad, based on a re-reading of recent 

international developments, has placed Iran on a far more aggressive track than his predecessor 

Khatami. Believing that the U.S. is unwilling to undertake another war in the Middle East, Iran 

has concluded that conditions are set to force the issue of its ‘inalienable nuclear rights.’ No 

longer, Tehran has reasoned, is it necessary to court the European nations and prevent them from 

presenting a unified front with the United States in the Security Council. With the seeming lack 

of any real military threat from the United States and a Chinese (and possibly Russian) ally in the 

 

30 “US-China Trade Statistics and China's World Trade Statistics,” The US-China Business Council, 

http://www.uschina.org/statistics/tradetable.html. 31Iran: Editorial Views PRC to Provide ‘Stability’ in Persian Gulf Region. Editorial by Behnam Sarkheyl from the 

“Note” column: “China’s Link to Persian Gulf Security,” Shoma, 25 Mar 2006. (FBIS) 32Commentary Warns China, Russia Not to Follow US Lead in Iran Nuclear Case, Commentary by Ali Qasemi: 

“Iran-China Relations, Low-cost Path,” Resalat, 1 March 2006. (FBIS) 33“Daily Wants China to Stop Iran Dossier Going to UN Security Council,” Aftab-e Yazd, 7 Nov 2004. (FBIS) 
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9 U.S.-China Economic and Security Review Commission

Security Council, Iran reasoned such conditions would be enough to safeguard against intense 

international sanction. 

Iran, however, appears to be over-estimating China’s ability and desire to safeguard Iranian 

interests by confronting the United States and the West. In moving toward sanctions over Iran’s 

nuclear program, Iranian analyses at the government and civil-society level have been slow to 

pressure China, which has never vetoed a Security Resolution relating to the Middle East. (The 

PRC voted with the UN Security Council for Iran to end it nuclear program by August 31, 2006.) 

Indeed Iran has been unwilling to critique China’s role in acceding to Security Council pressure, 

instead reaffirming the strength of Sino-Iranian relations and reserving its ire for the U.S. and 

Europe. At the end of the above cited Aftab-e Yazd editorial, for example, which strongly 

beseeched China to stop Iran’s nuclear dossier from reaching the Security Council, the following 

statement appeared: 

In the last working hours of the daily, we received the comments of the Chinese 

foreign minister, which indicate that we should not set many hopes in China in the 

Security Council. So the matter should be taken into account in our relations. 

Already in 2004, when the editorial was published, China seemed to know it would be voting 

alongside the rest of the Security Council. The interim period (2004-2006), one can suspect, was 

simply a matter of extracting maximum concessions both from Iran, such as the above-cited 

Sinopec deal, and the United States. As John Garver points out in China and Iran concerning the 

intersection of Sino-Iranian and Sino-U.S. relations: 

China's support for the anti-hegemony struggle had to be conducted in such way 

as not to undermine China's relation with the United States. China's overriding 

foreign policy interest was in ensuring that the United States continued 

benevolent, friendly policies toward China's post-1978 economic development 

drive. There was a contradiction between this objective and China's support for 

Iran's antihegemony struggle, and this contradiction had to be handled correctly. 

When absolutely necessary, the secondary goal of moving the world toward 

multipolarity by supporting Iran's antihegenomy resistance would be subordinated 

to the primary goal of protecting the Sino-U.S. relationship.34

While China had used its resistance over sanctions in the Security Council to provide Iran with 

the time needed to settle the nuclear crisis on its own terms, the cost of fully supporting a 

sovereign and indigenous Iranian nuclear program is simply too high. China has gone to great 

lengths in the Security Council, and elsewhere, to demonstrate to the Iranians the importance of 

Sino-Iranian relations. For example, in July 2006, after voting in favor of a one-month deadline 

for Iran to end its enrichment of uranium or face Security Council sanction, Ambassador Liu 

Zhemin of China stated that, “Whether now or in the future, the Council could not handle the 

issue single-handedly. Dialogue and negotiations were the only way out. IAEA should always 

 

34See Garver Chapter 7. 
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10 U.S.-China Economic and Security Review Commission

be the main mechanism for dealing with the issue. Any measures adopted by the Council should 

serve the purpose of diplomatic efforts.”35 

Such a statement, coupled with a Chinese vote against Iran in the Security Council, encapsulates 

the delicate balance of Sino-Iranian relations. China is certainly eager to continue its close 

relationship with a Middle Eastern regional power, but red-lines in Sino-Iranian relations do exist. 

China’s hope is simply that the stored capital it has garnered from arms sales during the Iran-Iraq 

War, assistance in nuclear technology, economic partnership, and proven mutual trust is enough 

to maintain Iran’s willingness to “look east,” especially in the energy arena. 

For China, partnership with Iran is only one part of its energy diversification strategy. Chinese 

goodwill is by no means guaranteed, but very much desired. Under such an arrangement, Iran is 

best seen as only one strand among the complex web of energy relationships China is currently 

pursuing. 

4. THE SHANGHAI COOPERATION ORGANIZATION 

To understand how energy and security needs are influencing the relationship between China and 

Iran, it is important to assess their diplomatic relations. In the past year, no aspect of diplomacy 

has received more attention than the Shanghai Cooperation Organization (SCO). For in the 

words of former Iranian foreign minister Akbar Velayati, 

In the framework of the Shanghai cooperation agreement, Russia, China, India 

and Iran, together with other Asian countries, are busy establishing a new political 

bloc in the world, which in addition to confronting any one-sided attempt at 

hegemony by NATO, are also trying to establish a secure and stable climate 

throughout Eurasia.”36 

Since 2005, the six member SCO – including Russia, China, Kazakhstan, Kyrgyzstan, Tajikistan 

and Uzbekistan – has emerged from relative obscurity to be viewed in some circles as a serious 

counterweight to American power in Asia and even, in the words of Cambridge University's 

David Wall, “an OPEC with bombs.”37 In reality, the SCO is a young organization with few 

current capabilities. Its operating budget is less than U.S.$30 million, and it employs only a few 

dozen people.38

Despite its limited effectiveness at the current time, the SCO is receiving extensive attention 

from western experts because of its potential. In 2005, the SCO added Mongolia, Pakistan, Iran 

and India as official observers. As Iranian President Mahmoud Ahmadinejad stressed in a 

speech at the SCO in June 2006, nearly half the world’s population lives in member or observer 

 

35“Security Council Demands Iran Suspend Uranium Enrichment by 31 August, or Face Possible Economic, 

Diplomatic Sanctions,” Security Council SC/8792, Department of Public Information—News and Media Division, 

The United Nations, New York 31 July 2006. http://www.un.org/News/Press/docs/2006/sc8792.doc.htm. 36Iran: Former Foreign Minister Comments on Oil, Gas Links with China. Unattributed report: “Ali Akbar Velayati: 

Iran-China cooperation will strengthen security in the region,” E’temad-e Melli, 25 Feb 2006 (FBIS). 37 Michael Mainville, “A potential rival for NATO,” The Toronto Star, June 3, 2006. 38 “China and Russia: New 'axis' in the making?” The Straits Times (Singapore), July 21, 2006. 
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11 U.S.-China Economic and Security Review Commission

countries.39 If the SCO participating states emerged as a united force diplomatically, 

economically, or militarily, they would be a potent player in the international arena.40

4.1 Differing Goals 

Despite its potential, it remains unclear what the SCO can and will become. Even the member 

states themselves do not appear to be in agreement on how the SCO should evolve. Some 

participants see the SCO emerging as a potent counterweight to American power. Iranian 

President Ahmadinejad has called for increasing the role of the SCO to “prevent threats and 

interventions by bullying powers.”41 Russian Defense Minister Sergei Ivanov has said that 

member states “should, if needed, help neighboring states block and possibly destroy” 

invaders.42 This attitude held sway in 2005, when the SCO members passed a resolution calling 

on the United States and its coalition to “set a final timeline” for the “stay of their military 

contingents on the territories of the SCO member states.”43 Soon after, the U.S. was asked to 

leave its base in Uzbekistan, and operations at Manas airbase in Kyrgyzstan were limited to 

flights that re-supply the U.S. mission in Afghanistan.44 As an editorial in a conservative Iranian 

daily put it, “fighting against America's unilateralism and removing its bases in Central Asia and 

the Caucasus region can also be considered as one of the goals of the SCO.”45 (For more on SCO 

military capabilities, see Appendix.) 

Fears that the SCO is emerging as the diplomatic forum for disgruntled dictators sharing a 

common disgust for the United States were raised by the SCO’s 2006 meeting. First, the SCO 

members welcomed Iranian President Ahmadinejad despite American attempts to isolate the 

Islamic Republic diplomatically for its nuclear program.46 Next, many Central Asian leaders 

used the meeting to express strong opposition to America’s pro-democratic foreign policy, which 

they believe is partially responsible for revolutions that toppled pro-Russian and pro-Chinese 

allies in Ukraine, Georgia, and Kyrgyzstan.47 

 

39 Fars News Agency, “Ahmadinejad: Development of Shanghai Cooperation Impedes Intervention of Bullying 

Powers,” June 15, 2006. http://english.farsnews.com/newstext.php?nn=8503250185 

40 In the words of Michael Berk, who is with the Canadian Institute of International Affairs, “Any entity whose 

purpose, like the SCO, is promoting stability, cooperation and economic development in a region consisting of such 

pivotal countries as India and China, as well as such resource-rich states as Russia and Kazakhstan, will be a 

powerhouse of economic activity and a major global force throughout this century.” “SCO will be economic 

powerhouse: Canadian scholar,” Xinhua General News Service, June 16, 2006. 

41 Fars News Agency, “Ahmadinejad: Development of Shanghai Cooperation Impedes Intervention of Bullying 

Powers,” June 15, 2006. http://english.farsnews.com/newstext.php?nn=8503250185 

42 Michael Petrou, “Is this a Rival to NATO?” Maclean's, August 7, 2006. 43 “Declaration of Heads of Member States of Shanghai Cooperation Organisation,” Astana, July 05, 2005. 

(Unofficial translation by the SCO Secretariat.) 44 Ariel Cohen, “How the US can crash a cosy club,” The Straits Times (Singapore), June 15, 2006. 45 "Viewpoint" column, by Sa'id Arjomandi: "On the Sidelines of the Shanghai Meeting,” Resalat, Tuesday, July 18, 

2006. Compiled and distributed by NTIS, US Dept. of Commerce. 

46 The U.S. Defense Secretary Donald Rumsfeld chided China for backing Tehran's participation in the summit, 

asserting it had invited the “leading terrorist nation in the world into an organization that says it's against terror.” 

SCO chief Zhang Deguang responded, “We cannot abide by other countries calling our observer nations sponsors 

of terror.” Ali Akbar Dareini, “In Shanghai, Iran's president sounds out Russian, Chinese backing in nuclear 

standoff,” Associated Press Worldstream, June 14, 2006. 47 Jehangir Pocha, “Summit Forges Military Ties in Central Asia,” The Boston Globe, June 18, 2006. 
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12 U.S.-China Economic and Security Review Commission

4.2 The Role of Energy in the SCO 

Though it was initially formed to deal with border disputes, terrorism and separatist threats, 

energy cooperation has emerged as a primary focus for the SCO. In particular, Chinese analysts 

increasingly talk about using the SCO to turn the old Silk Road across Central Asia into an 

‘energy road.’48 Like China, Russia views the SCO as a tool to promote energy development, as 

expressed in a 2005 op-ed by the Deputy Foreign Minister: 

“Cooperation in fuel, energy, and transport may bring great benefits. Potentially, the SCO 

members can pool their efforts in geological prospecting, and jointly develop Central Asia's vast 

resources.” He argued that the SCO could facilitate energy projects, some of which would be 

“the projects of the century.”49 Also, Pakistani President Pervez Musharraf used recent SCO 

meetings to propose that his country serve as an "energy corridor" between producers and 

consumers, a suggestion believed to be aimed at a possible oil pipeline from Iran to China or 

India through Pakistan.50 51

Iran also views the SCO as a tool for expanding energy exports. In his speech at the SCO in 

June 2006, President Ahmadinejad said “the presence of both the energy consumer and producer 

states in the organization has prepared a proper ground for energy cooperation within the SCO.” 

He proposed a summit for energy ministers of the member states “to study avenues for better 

cooperation in various grounds such as exploration, extraction, transportation, transformation 

and improved and joint exploitation of energy.”52 Ahmadinejad also emphasized that Iran's large 

reserves of crude oil provide “conducive grounds” for these countries to cooperate with Tehran.53 

At the SCO meeting in June, Iran and Russia held bilateral talks in which they discussed an 

“energy club.” This term, which has eluded any definition, has raised fears that these oil 

producers are considering a new form of cartel.54 

It is clear that these relationships go beyond political rhetoric. Over the last year, China, India, 

Russia, and Iran have signed energy deals with each other valued at about $500 billion.55 In the 

immediate aftermath of the 2006 summit, Sinopec reportedly signed an agreement to develop 

Iranian oil fields.56 China's oil imports from Kazakhstan more than doubled in the first four 

 

48 Gordon Fairclough, “Iran Lobbies China, Russia to Help Curb U.S.; At Summit in Shanghai, Tehran Plays Its Oil 

Card In Push to Forge Alliance,” Wall Street Journal. Jun 16, 2006. pg. A.4 

49 Alexander Yakovenko, “Seeking Multilateral Regional Cooperation,” The Hindu, August 12, 2005. 50 Bill Savadove, “Tehran Seeks Allies Through Energy Co-operation Offer,” South China Morning Post, June 16, 

2006. 

51 Steven R. Weisman, “As the Price of Oil Soars, So Does Its Power to Shape Politics From Washington to 

Beijing,” The New York Times, July 25, 2006. 52 Fars News Agency, “Ahmadinejad: Development of Shanghai Cooperation Impedes Intervention of Bullying 

Powers,” June 15, 2006. http://english.farsnews.com/newstext.php?nn=8503250185 

53 Gordon Fairclough, “Iran Lobbies China, Russia to Help Curb U.S.; At Summit in Shanghai, Tehran Plays Its Oil 

Card In Push to Forge Alliance,” Wall Street Journal, June 16, 2006. pg. A.4 54 John Cherian, “Shanghai spirit,” Frontline (from the publishers of The Hindu), Volume 23 - Issue 13: July 1-14, 

2006. 

55 Jehangir Pocha, “Summit Forges Military Ties in Central Asia,” The Boston Globe, June 18, 2006. 56 “China's Sinopec Signs a Deal To Develop Oil Block in Iran: Report” Hong Kong AFP, Compiled and distributed 

by NTIS, US Dept. of Commerce. 
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13 U.S.-China Economic and Security Review Commission

months of the year, compared with the same period in 2005. Crude imports from Russia climbed 

36 percent during the same period.57 

Western analysts are increasingly alarmed that the economic endgame of the SCO is “to dilute 

Washington's hold over the Caspian Sea's energy reserves,” as Robert Karniol, Asia-Pacific 

editor for Jane's Defense Weekly, put it. China and India, the world's fastest-growing energy 

consumers, want to divert Central Asia's energy resources toward their own economies, and Iran 

and Russia, the region's largest energy suppliers, are keen to reduce their dependence on sales to 

the West, Karniol argues.58 

Despite this concern, the SCO is not a “mercantilist” tool for China to “lock up” the oil reserves 

of unseemly governments in central Asia.59 In a global market, locking up oil is exceptionally 

difficult. Lt.-Gen. William Odom (retired), a professor at Yale and former director of the 

National Security Agency, explains, “I've never been of the view that you have to be highly 

influential in a region to get it to sell you oil.”60 

First of all, China’s overseas activities are not on a scale that would warrant the level of 

international concern and condemnation it has received. The Energy Information Administration 

explains: “For all the attention given to Chinese firms’ investments in overseas oil assets... their 

total current contribution to China’s oil imports is well under 300,000 barrels per day as of mid2005, a small amount compared to imports currently running at around 3.5 million barrels per 

day.” 61

Second, major development projects between SCO states have not proceeded without difficulty. 

For instance, a 2004 Memorandum of Understanding between Iran and China to establish a 25 

year agreement for LNG exports worth $100 billion has so far only led to further negotiations, 

despite the big splash when signed.62 63 Similarly, a plan to build a pipeline from Russia to 

China was announced in 2003, yet the two governments continue to negotiate the terms of this 

agreement. 

But most importantly, it is vital to understand that the only way for China to lock up oil in 

today’s market, even with its SCO partners, would be to sign long-term purchase agreements and 

 

57 Gordon Fairclough. 

58 Jehangir Pocha. 

59 In September 2005, US Deputy Secretary of State Robert Zoellick said in a speech: “China is acting as if it can 

‘lock up’ energy supplies around the world. Moreover, a mercantilist strategy leads to partnerships with regimes 

that hurt China’s reputation.” In 2006, the U.S. National Security Strategy again accused the PRC of trying to 

“lock up” oil resources. 60 Michael Petrou, “Is this a Rival to NATO?” Maclean's, August 7, 2006 61 Esser. 

62 “China's Sinopec Signs a Deal To Develop Oil Block in Iran: Report” Hong Kong AFP, Compiled and distributed 

by NTIS, US Dept. of Commerce. “China, Iran close to finalize energy contracts” (AFP), February 17, 2006, from 

China Daily. 63 China considered sending its top economic planner to Iran in February in hopes of finalizing energy contracts, 

but Chinese Minister of the State Development and Reformation Commission Ma Kai did not visit until late June. 

After the meeting, Ma Kai said "The economies of China and Iran are closely tied together," and called for an 

increase in Tehran-Beijing transactions, but the visit did not produce a final deal. “Iran, China Underline Energy 

Cooperation Agreements,” BBC Monitoring International Reports, July 4, 2006. 
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14 U.S.-China Economic and Security Review Commission

outbid the other firms in the race. Chinese state firms can consistently win bidding wars only if 

(a) they are willing to pay more for oil than private firms from the United States, India, and 

Europe believe the resource to be worth, or (b) oil rich SCO states are willing to accept reduced 

financial reward in order to sell their oil to China. If China wishes to burden its economy with 

fuel costs above market value, the United States, as an economic competitor, would have a 

comparative advantage over oil intensive industries in China. 

China’s attempt to secure long-term oil supply is better understood as a hedging technique. 

Chinese oil companies, and their private investors, are willing to pay higher prices because the 

demand for fuel in China is growing rapidly, and the firms believe that there will be a market for 

their product, even at prices above the world average. 

4.3 Interests 

A thorough assessment of the SCO reveals that the states participating in the SCO do not have 

matching interests regarding energy or military power.64 As oil prices have risen from about $27 

a barrel at the start of the Iraq war to a high of $78 during the conflict in Lebanon, Iran and 

Russia benefited while India and China suffered. According to Cambridge Energy Research 

Associates, each $5 increase in oil prices translates into $85 million a week for Iran's bank 

account.65

Ariel Cohen correctly notes, “If not restrained and contained, Iran is likely to drive world oil 

prices even higher” as part of its agenda. He points out that Russia, as a high-cost oil producer, 

benefits from Middle Eastern instability that keeps oil prices high.66 

China and India, on the other hand, are economic powers dependent on cheap Middle East oil. 

Their interests are in working together with major consumers to keep prices reasonable. To this 

end, the two states have recently signed an agreement designed to end the “mindless rivalry” 

over oil. The agreement has established a formal procedure to exchange information about oil 

development bidding. The agreement may lack teeth, but it demonstrates that two of the world’s 

major consumers have recognized that, as India's petroleum minister put it, “rivalry only benefits 

those who are selling assets, no matter which country wins.”67 There is evidence that China 

would be willing to pursue similar cooperation with the U.S. In a recent speech Zhang Guobao, 

Vice Minister of NDRC, stated, “Conditions are favorable for Chinese and U.S. oil firms to 

cooperate on the development of oil fields in third countries.”68 

 

64 See the Appendix to this report for analysis of the military dimension of the SCO. 

65 Weisman. 

66 Ariel Cohen, “How the US can crash a cosy club,” The Straits Times (Singapore), June 15, 2006. 

67 Carola Hoyos, Jo Johnson and Richard McGregor, “China and India forge alliance on oil with aim of ending 

'mindless rivalry',” Financial Times (London), January 13, 2006. 68 “Cooperation between Chinese and US firms could be mutually beneficial,” Xinhua, September 13, 2006. 

Accessed at Sinopec News site on September 13, 2006: http://sinopecnews.com.cn/shnews/2006-

09/13/content_407064.htm 
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15 U.S.-China Economic and Security Review Commission

5. CHINA AND SAUDI ARABIA 

Sino-Saudi relations are a relatively new development, with China and Saudi Arabia having only 

established relations in 1990. This year has been a landmark year in Sino-Saudi relations, 

witnessing the visit of Chinese President Hu Jintao to Saudi Arabia and the visit of Saudi King 

Abdallah to China. King Abdallah’s visit to China was his first trip outside of the Middle East 

since ascending the throne in August 2005. 

According to Arabic sources, the exchange of visits between King Abdallah and President Hu 

point to the unquestionable seriousness of Sino-Saudi relations. First, Hu’s trip to Saudi Arabia 

occurred only three months after Abdallah’s trip to China.69 Indeed, during his trip to Saudi 

Arabia, President Hu himself pointed out that head-of-state exchanges in such a short amount of 

time are extremely rare.70 Second, Hu was only the second foreign president to address the Saudi 

Consultative Council, after Jacques Chirac.71 Third, the Hu visit ended with tangible results, not 

only in regards to energy, but also other fields, such as health and trade.72 Accordingly, Chinese 

Middle East envoy Sun Bigan pointed out, the visits “laid a solid foundation for the growth of 

bilateral ties in the years ahead.”73 A Saudi Arabia Information Resources report from April 

2005 states: 

...Abdullah Al-Mubti, head of the delegation and chairman of the Abha Chamber of 

Commerce and Industry, said the Arab-China Business Conference in Beijing was 

successful as it helped strengthen mutual confidence. He said the organizers have agreed 

to hold the second conference in an Arab country. More than 200 Arab businessmen took 

part in the conference.... He added Saudi-Chinese trade exchange grew from $300 

million in the beginning to $10 billion (SR37.5 billion) last year.74

The greatest challenge for China in expanding the scope of Sino-Saudi relations will be allaying 

Saudi Arabian fears over the nature of relations themselves as well as China’s close relationship 

with the Iran. Indeed in his speech to the Consultative Council of the Kingdom of Saudi Arabia, 

Hu Jintao strove to allay Saudi fears over expanded ties with China in these two key regards. 

First, President Hu stressed the importance of China’s non-interference policy, not only in an 

effort to maintain peace and stability, but also in terms of a country’s internal security. He 

explained that countries “should respect and maintain each country’s right to independently 

choose its social system and its road of development.”75 By reiterating their long-standing 

commitment to non-interference in the context of Sino-Saudi relations, China wishes to 

 

69For example see, in Arabic: “The Kingdom and China are Signing Agreements for Security and Defense 

Cooperation and a Memorandum of Understanding for the Advancement of Trade,” Al-Riyadh, 23 Apr 2006, Issue 

13817. http://www.alriyadh.com/2006/04/23/article148704.html. 70Ibid. 

71For example see in Arabic: Aliyan Al-Saadan. “Chinese President Addresses Shura Council with Important 

Speech,” Al Jazeera, 22 Apr 2006. 

72“The Saudi-Chinese Summit Culminates in Agreements Related to Security, Defense, Health and Trade,” AlSharq Al-Awsat, 23 Apr 2006, Issue 10008. In Arabic at 

http://www.asharqalawsat.com/details.asp?section=3&article=359563&issue=10008 73“Saudi crown prince meets Chinese Mideast envoy,” Xinhua, August 15, 2006. 74From the Saudi Arabia Information Resource website, April 17, 2005: http://www.saudinf.com/MAIN/y8082.htm. 75“Promote peace in the Middle East and build a harmonious world,” Xinhua, April 23, 2006. 
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16 U.S.-China Economic and Security Review Commission

distinguish Sino-Saudi relations from the current trend in U.S.-Saudi relations, namely the effort 

by the U.S. government to push for political liberalization in Saudi Arabia since September 11th. 

Indeed Saudi Arabian government officials have already expressed appreciation for China’s 

commitment to a policy of non-interference, especially in times of unrest in the Middle East.76 

Put simply, Chinese companies are not constrained in their overseas activities by the political 

commitments of their home country in areas such as human rights and nuclear non-proliferation 

as are their American counterparts.77 

In seeking to diversify its cooperation with Asian companies in export markets, but also 

technical know-how, arms and ammunition, and education for the elite, Saudi Arabia welcomes 

new partnerships that do not advise it on how to run its internal affairs and do not contain any 

“strings” on how the Saudi Royal Family should rule.78 As Prince Turki Al-Faisal, the Saudi 

Arabian ambassador to the United States, noted in a discussion with USA Today, China is “[n]ot 

necessarily a better friend [than the United States], but a less complicated friend.”79 While Turki 

went on to state that Saudi Arabia does not see China as a counter-weight to the United States, 

the above quoted comment should be read as a new realization by many in Saudi Arabia to the 

negative aspects of too close an association with the United States. 

The second key point in the Chinese president’s address concerned regional rivalry among states 

in the Middle East. “Different civilizations of the region should take a peaceful and 

magnanimous attitude toward each other’s differences,” Hu said. He continued by stating that 

“[d]ifferences should not become the root cause to regional conflicts and contradictions, but 

should become each other’s reference and a force for integration of the region.”80 By speaking 

specifically about the civilizational differences as a source of contention in the Middle East, 

namely among Persians and Arabs, Hu not so subtly hinted that Sino-Saudi relations will not be 

subservient to China’s close relationship with Iran, a country Saudi Arabia views with extreme 

concern and skepticism. 

For China, with its sensitivity to volatility in oil price and supply, the stability of Saudi oil supply 

is enticing, as is the level of influence the Saudis are seen as having over both OPEC and nonOPEC oil producers. Chen Mo, a researcher at the Chinese Academy of Social Sciences, went 

so far as to say that, “In the future... ...Saudi Arabia will be China’s largest source of oil.”81 

Though 2006 saw the prospect of high-profile expansion of Sino-Saudi relations, it is important 

to place the China-Saudi Arabia relationship in its proper global context. China’s commitment to 

increasing its relationship with Saudi Arabia is not simply a matter of locking up vast oil reserves. 

Nor, from the Saudi perspective, is it simply a matter of replacing an American export market 

with a Chinese one. 

 

76“Saudi crown prince meets Chinese Mideast envoy,” Xinhua, August 15, 2006. 77Anthony Bubalo. “Asia’s alliance with the Middle East threatens America,” The Financial Times, October 6, 2005. 78Aziz-ud-Din Ahmad. “Saudi Arabia’s Quest for New Allies,” The Nation, February 1, 2006. 79Prince Turki discussion with USA Today editors and reporters appeared in the May 10, 2006 edition of the paper. 80Ibid 

81 Today, Angola is China’s largest supplier. Chen Mo, “The Duet Between Saudi Arabia and China on Oil 

Cooperation: Deepening the Reliance on Middle Eastern Oil,” Dazhong Web Reporting Service, August 29, 2006. 

Accessed September, 2006 at http://www.dzwww.com/caijing/cybd/200601/t20060123_1336444.htm. 
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17 U.S.-China Economic and Security Review Commission

For Saudi Arabia, the increase in cooperation with China may signal an attempt to end the 

kingdom’s overwhelming reliance on “one big friend” and “one big product,” i.e., the United 

States and oil.82 Saudi Arabia has recognized that increased diversity of its oil exports and 

movement away from its heavy reliance on the American market has both economic and political 

benefits. Saudi Arabia cannot ignore the increased energy needs among Asian countries, such as 

China and India. The prospect for revenue is simply too large. As advisor to the Saudi minister 

of commerce and industry, Fawaz al-Alami, pointed out, “[t]he growth in our oil exports and 

petrochemicals will be China and India. Five years ago our trade with China was only $200 

million. Now it’s $14 billion, and in five years we expect it to be $45 billion.”83 

Furthermore, by distancing itself from a disproportionate reliance on the U.S. energy market, 

Saudi Arabia will be able to better extricate itself from the political costs of a close relationship 

with the United States. While Saudi Arabia has indicated its willingness to increase democratic 

participation in the country, the likelihood that Saudi measures will fully satisfy U.S. concerns in 

this regard is slim. The Saudi royal family’s primary concern is to maintain its position of 

preeminence. In short, advancing democratic reforms too swiftly, if at all, may jeopardize the 

House of Saud’s stability in the country. Second, Saudi Arabia’s close relationship with the 

United States continues to play to the detriment of the country’s image both at home and abroad. 

As recent instability in Iraq, Israel/Palestine, and Lebanon has demonstrated, the self-styled 

leading country of the Islamic world is beginning to come under fierce criticism for its 

unwillingness to jeopardize Saudi-American relations for the purpose of Islamic solidarity. The 

most recent example of such criticism can be found in the initial Saudi Arabian government 

condemnation of Hezbollah in its recent war with Israel, against the views of elements in Saudi 

Arabian society at large.84 Such image problems at home present an additional reason to slow 

democratic reform, as an increase in voter and candidate participation could give rise to a series 

of populist contenders. Finally, the rising calls in the U.S. for more vigilance (and protectionism) 

in business dealings with Arab countries, as evidenced by the Dubai port ownership incident, 

could also increase Saudi wariness of the future of Saudi-U.S. relations. 

Based on preliminary assurances by China on the direction of Sino-Saudi relations and the 

possible cooling of Saudi-U.S. relations, expanded ties between China and Saudi Arabia appear 

primed to move forward. However, Sino-Saudi relations are still in their infancy and it is 

uncertain the precise direction they will take. It is unlikely, for example, that now or in the 

immediate future Saudi Arabia would seek to use China as a viable strategic and military 

alternative to the United States. As the recent War in Lebanon indicates, Saudi Arabia remains 

fearful of the ability of Iran and Hezbollah to destabilize the Saudi regime. Security and stability 

of the Saudi regime remains of the utmost importance and, in that regard, U.S. military might in 

the Gulf is the House of Saud’s final guarantor. 

 

82“Saudi Partnership with Asian Giants a Trailer,” Financial Times, Global News- Asia Africa Intelligence Wire, 

January 31, 2006. 

83Roula Khalaf. “Saudis look east for new friendships in ‘rebalancing’ of foreign relations,” The Financial Times, 

March 1, 2006. 

84Faiza Saleh Ambah. “Arab Leaders, Unlike Much of Public, Uneasy about Hezbollah,” The Washington Post, July 

24, 2006, A12. 
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18 U.S.-China Economic and Security Review Commission

China’s aim in expanding Sino-Saudi relations is very similar to the Saudi rationale for expanded 

relations—diversification. In Saudi Arabia, China sees a way in which it can diversify its Middle 

Eastern oil suppliers and depend less on Iran for Middle Eastern oil. Additionally, a closer 

economic relationship with Saudi Arabia should be absent of the possible political consequences 

and image concerns that occur in Sino-Iranian relations. The PRC sees a great economic 

opportunity in expanded relations with Saudi Arabia, but not a replacement for their political and 

strategic partnership with Iran. Thus, the expansion of Sino-Saudi relations provides each 

country with the same need: the mitigation of reliance on one main oil supplier/consumer, rife 

with political and image concerns, with a less complicated and dramatic economic partnership. 

6. XINJIANG: A POTENTIAL FLASHPOINT? 

Religious and cultural differences between China and its Middle Eastern partners have had little 

effect on the trajectory of their relations to date. However, one possible flashpoint for the future 

of Sino-Saudi and Sino-Iranian relations may involve the treatment of Uighur Muslims in 

China’s western Xinjiang province. 

Saudi Arabia and Iran have shown little concern for the plight of Uighur Muslims, who are 

subject to Chinese human rights abuses in Xinjiang. Indeed, the Uighurs remain a repressed 

Muslim community that receives scant treatment in the international media (including in the 

Islamic world). The lack of media attention regarding the Uighurs has thus far allowed both 

Saudi Arabia and Iran to avoid the issue. Were the rights of Xinjiang’s Muslims to become of 

greater concern in the Islamic world, both Saudi Arabia, as the guardian to the two Holy Cities of 

Islam and self-styled leader of the Islamic world, and Iran, whose championing of the 

dispossessed has been a staple since its revolution, could condemn Chinese policy. 

The likelihood that the Uighurs’ plight will somehow trigger world-wide attention in the near 

future, particularly in the Islamic World, is unknown. Anecdotal evidence provided by Bradley 

Jensen Murg, a PhD candidate at the University of Washington, currently researching Uighur 

issues in Urumqi, Xinjiang, suggests that Chinese authorities in Xinjiang have a firm political 

and military grip, with no evidence of any anti-regime political organization or armed 

resistance.85

However, there are two factors that might bring greater world-wide attention to Xinjiang’s 

Muslims. First, in the past five years (2001-2006), China has aggressively increased its policies 

of repression against Uighurs. After September 11th, 2001, for example, China has used the 

United States “war on terror” to pursue its own aggressive campaign against Uighurs Muslims in 

Xinjiang. A 2004 Amnesty International Report on Chinese abuses in Xinjiang states that China 

“continues to use ‘anti-terrorism’ as a pretext to suppress all forms of political or religious 

dissent in the region.”86 According to Zhao Yongchen, one of China’s top anti-terrorism officials, 

Muslim separatists in western China have carried out 260 attacks and killed 160 people over the 

 

85 Interview with Bradley Jensen Murg, August 25, 2006, by John Keefer Douglas. 86“People’s Republic of China: Uighurs fleeing persecution as China wages its ‘war on terror’,” Amnesty 

International, 7 July 2004. http://web.amnesty.org/library/index/engasa170212004. 
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19 U.S.-China Economic and Security Review Commission

past ten years.87 In official literature, the Chinese government also blames “outside forces,” such 

as al-Qaida, for sowing unrest in the province.88 The World Uighur Congress, however, has 

stated that the “policies of political oppression, cultural assimilation, economic exploitation, 

ecological destruction, racial discrimination have gradually turned East Turkestan into a time 

bomb.”89

Second, in the coming years China will more aggressively exploit Xinjiang’s rich natural 

resources and proximity to Central Asia. If regional projects such as the SCO and the Silk Road 

Initiative are successful, Xinjiang could serve as the lynchpin of overland trade between China 

and Central Asia. If the plight of Uighur Muslims does become a sustained news story in the 

Islamic World, the reactions of Saudi Arabia and Iran will be a telling signal of the value they 

place on their relations with China. 

7. ASSESSMENT OF CHINESE STRATEGY AND POLICY 

After the end of the Cold War, most analysts in China expected to see the rise of a multipolar 

world, in which coalitions of weaker states formed to counter the power and interests of the U.S., 

constraining its ability to act as hegemon.90 By the early 1990s, such a situation had not 

materialized and the application of U.S. military and economic power worldwide was left 

seemingly unchecked. Thereafter, the Chinese leadership concluded that in the area of energy, 

the best way to deal with a unipolar world was to try to compete with the U.S. at its own 

economic game, sending out Chinese companies to secure supplies both regionally and around 

the world in the same way that U.S.-based multinationals routinely do.91 This can be seen as a 

strategy of competing with the U.S. and its allies in a way that tries to avoid direct confrontation, 

by playing by the rules of international capitalism. 92 

One consequence of this policy for China has been a strong public de-emphasis of military 

capabilities (except as they relate to Taiwan), and an unwillingness to provoke the U.S. through 

attempts to form strong military alliances.93 China would much rather hide its strength and build 

commercial relationships, believing that such a strategy can be just as effective in thwarting U.S. 

dominance in key regions such as the Middle East. As countries in the region stand up on their 

own to U.S. pressure, they feel secure in the knowledge of continued access to Chinese markets 

 

87“China blames Muslim independence groups for 260,” Saudi Press Agency, 6 Sept 2005. 

88Benjamin Robertson. “China’s ‘war on terror, under scrutiny,” Al Jazeera, 21 July 2004. 

89“China given warning on Xinjiang,” BBC World News, 30 Sept 2005. http://news.bbc.co.uk/2/hi/asiapacific/4297070.stm. 90 Lecture by Alan M. Wachman on “The Putative ‘Rise of China,’” April 3, 2006, The Fletcher School. 

91 Zhang Weiping, “Overseas energy strategy needed,” China Daily, November 7, 2005. Author is an associate 

chief economist at CNOOC. 

92 Use of terms unipolarity and multipolarity follows Avery Goldstein, Rising to the Challenge: China’s Grand 

Strategy and International Security (Stanford: Stanford University Press, 2005) 81-94. 

93 Even recent Chinese commentary holds to the line that China cannot hope to compete militarily with the US, nor 

will it be able to for decades to come. See especially Sun Xuefeng, “The Effectiveness of China’s Policy Towards 

the United States, Chinese Journal of International Politics, (2006) 1, 1: 57-81. 
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20 U.S.-China Economic and Security Review Commission

should relations with the U.S. sour.94 Especially in the Middle East, continued erosion of U.S. 

influence is understood by Chinese leaders as facilitating its ability to pursue energy supply 

wherever it can. With the belief that U.S. criticism of China for doing business in places like 

Iran, Syria and Sudan is increasingly falling on deaf ears in the international community,95 China 

feels emboldened to ignore U.S. pressure, as it becomes harder for America to garner support for 

sanctions or other means to punish or isolate China and its energy suppliers. There appear to be 

limits, however, on how far China is willing to go down this road, as evidenced by their reported 

hedging on investments in Iran.96 China values its U.S. ties, and can be persuaded in certain 

circumstances to constrain its political support for states like Iran. 

A major source of U.S. weakness, in the eyes of Chinese analysts, is that the top priority of U.S. 

international strategy is maintenance of hegemony (military, economic, and political). All other 

strategic and diplomatic priorities, including counter-terrorism, democratization, free trade, and 

energy supply are understood to be subsumed within this conceptual framework.97 The stated 

U.S. goal of fighting terrorism and promoting democracy in the Middle East is seen far more 

cynically by Chinese analysts as a thin cover for U.S. political, economic, cultural and military 

dominance. A very typical expression of this view can be found in the following quotation: “In 

reality, eliminating the terrorist threat is only one strategic objective of the U.S. ‘Greater Middle 

East Democratization Plan.’ An even larger objective is to install pro-U.S. political systems 

through the spread of U.S.-style ‘democracy’ and ‘freedom,’ strengthening their exclusive 

domination over the entire Middle East.”98 Current Chinese strategic thinking is characterized 

by the view that, as China engages and does business with any and all countries in the world, it is 

building a store of goodwill that may weaken U.S. dominance.99 So long as they continue to 

acknowledge U.S. military hegemony and keep the public face of Chinese military 

modernization focused squarely and solely on the Taiwan Straits, China sees no need to pursue 

policies that could lead to direct confrontation. 

7.1 Chinese Energy Policy 

In its 2005 white paper titled China’s Peaceful Development Road, the PRC explained its official 

energy policy as follows: “Through dialogue and cooperation regarding energy, China is 

working with other countries to safeguard energy safety and stability. China considers energy 

 

94 Such “foreign policy by proxy” is a strategy with deep roots in Chinese history and culture. To be able to achieve 

foreign policy objectives without direct, public action is the highest form of statecraft. For a more thorough 

treatment of Chinese Security and Defense Policy, see the Appendix to this report. 

95 Yin Jiwu and Li Jiangning, “The Limits on US Strengthening of Public Diplomacy in the Muslim World,” 

Research on International Issues (Guoji wenti yanjiu), 2006, no. 2. Translation by John Keefer Douglas. 96Andreas Landwehr, “China has much to lose from Iran nuclear crisis,” Deutsche Presse-Agentur, August 28, 2006. 

DBA reports that China has instructed Sinopec to hold off on implementation of the agreement signed to develop 

Iran’s Yadavaran oil field due to fears that Iran may be subject to a military strike. The push to develop Saudi 

relations can also be viewed in this light.

97 Ren Weidong: "United States Aims at Maintaining Its Exclusive Hegemony by Hyping the 'Long War' -- The 

'Long War' May Become the Indicator of the New Historical Period After the Short 'Post-Cold War' Period," 

Liaowang, July 19, 2006. Translation by FBIS. 

98 Yin and Li.

99 Yang Yi, “A Period of Strategic Opportunities for Chinese National Security,” Education and Research (Jiaoxue 

yu yanjiu) 2006, no. 4. Translation by John Keefer Douglas. 
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21 U.S.-China Economic and Security Review Commission

saving one of its basic state policies.”100 The origins of this policy rest in China’s clear need for 

oil, combined with its desire to continue its non-interventionist philosophy of foreign affairs, and 

its more recent awareness that a “rising” China could be perceived as a threat. Recognizing the 

need for imports from overseas, Deng Zhenghong, Enterprise Manager for Sinopec, stated that 

China’s overseas oil investments will be characterized by the following ‘sixteen character 

guideline’: “Consolidate the Middle East, develop the surrounding regions [i.e. border states], 

expand in Africa, and explore the Americas.”101 China is thinking globally, but it is not by 

accident that the Middle East is first on this list. 

As oil imports have grown, China has been forced to formulate an energy security policy, 

especially concerning the Middle East. In practical terms, this has manifested itself in a major 

restructuring of the Chinese oil industry in 1998. The government aimed to refocus the major oil 

firms, end the division of labor between them, and push them to emulate the major multinationals, seeking upstream production rights overseas to complement domestic activities.102 

Despite an all-out diplomatic push to secure overland supply from Russia and Central Asia, and 

recent deals signed with Venezuela,103 China realizes most of its future imports will have to 

come from the Gulf and North Africa: 

Taking into consideration global oil distribution, producing capacity, supply potential, import 

costs and other factors, most of China’s future oil imports, accounting for 70-80% of the total, 

will have to come from the Middle East and North Africa, particularly from the Gulf nations. 

As today’s international oil security is rooted in the uneven distribution of oil resources, 

China has to be able to cope with it and get out of it as much as possible. Although oil 

imported from Russia, Central Asia and other parts of the world would help China improve 

its oil security, there is no denying that Middle East and North African oil has been and will 

continue to be a big element in China’s oil security formula.104

This means continued reliance on shipping lanes, in particular the Straits of Malacca. As in all 

such points of geopolitical friction in the world, official Chinese policy maintains a strict stance 

of non-interference. China has gone so far as to say that they will “never consider a military 

solution [to problems in the straits],” preferring instead to make guarded references to U.S. naval 

activity in the region and the need to respect the sovereignty of bordering nations.105 Although 

improved relations with Russia and Central Asia, especially in the context of the SCO, are 

 

100 “Full Text: China’s Peaceful Development Road,” People’s Daily Online, December 22, 2005. 

http://english.peopledaily.com.cn 101Deng Zhenghong, Enterprise Manager, Sinopec, blog entry May 11, 2006. Accessed September, 2006 at 

http://www.boraid.com/darticle3/list.asp?id=55007. 102 The United States and Japan are Saudi Arabia and Iran’s largest oil customers, respectively. United States 

Congress Joint Economic Committee, “Iran’s Oil and Gas Wealth,” Research Report #109-31, March 2006. 

Obtained from www.house.gov/jec. 103 NPR “Marketplace,” August 28, 2006. 104 Wu Lei, “China-Arab Energy Cooperation: The Strategic Importance Of Institutionalization,” paper delivered to 

the China-Arab Cooperation Forum, sponsored by China’s Ministry of Foreign Affairs, in Beijing on 12-13 

December 2005. http://www.mees.com/postedarticles/oped/v49n03-5OD01.htm. 105“China-US Energy Cooperation: Challenges and Opportunities.” Policy statement by Chinese Energy Bureau 

(Vice Ministry under NDRC charged with formulating energy policy). Accessed on August 3, 2006: 

http://nyj.ndrc.gov.cn/dcyyj/t20051229_55139.htm. Translation by John Keefer Douglas 
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22 U.S.-China Economic and Security Review Commission

worthy of close attention, they do not yet demonstrate a policy shift for China. Chinese leaders 

remain acutely aware that a U.S. blockade of the Straits of Malacca could virtually paralyze their 

economy and that overland supplies will not replace ships in the foreseeable future.106

To many analysts in the U.S., the rapid emergence of Chinese state-owned oil companies on the 

global stage is of major concern. They argue that the companies are enacting the foreign policy 

directives of the central government by pursuing exclusive, long-term oil supplies that need not 

be sold on open markets, but rather can be sold within a closed Chinese retail market.107 

However, China’s leadership views its energy policy quite differently. As Zhang Guobao, 

deputy minister of the National Development Reform Commission (NDRC), explained, “Some 

people show they are biased against China's economic development by blaming China for 

boosting international oil prices. Why are other countries' oil imports justified, but it is called 'a 

threat' when it comes to China?"108 

To Chinese officials, their companies are only acting as any other major oil and gas firm by 

competing for supply contracts and expanding reserves. Zhang Weiping, an economist at 

CNOOC, explains: 

Leading global powers are readjusting their energy strategies. The United States has 

managed to strengthen its strategic position in the Middle East in the wake of the Iraq War 

and increased threat deterrence along oil transportation passages through its military 

presence. At the same time, Washington has reinforced control over global strategic 

resources via giant multinationals' activities worldwide.109 

To Zhang and his Chinese colleagues, a Chinese oil and gas firm is no different from Exxon 

Mobil. In the event of a crisis, they believe American firms would prioritize the U.S. market, 

and would be protected in this action by the strength of the U.S. Navy, a protection Chinese 

companies do not enjoy. There is strong evidence that China realizes the impossibility of 

locking up resources; Zhang Guobao’s recent comments on the willingness of Chinese oil firms 

to cooperate with U.S. firms in overseas upstream and downstream activities suggest that China 

is actively trying to allay U.S. fears of neo-mercantilist policy. Multinational oil firms may see 

no advantage in cooperative ventures with Chinese firms. Nonetheless, it may be in U.S. policy 

interests to promote such ventures as a way of highlighting U.S.-Chinese common interests as 

consumers, and mitigating the threat of bidding wars with China over oil fields. 

8. IMPLICATIONS & RECOMMENDATIONS FOR THE UNITED STATES 

The PRC’s stated policy of peaceful development is intended to assure major oil producers and 

major consumers that a ‘rising China’ will be a non-threatening trading partner in troubled 

 

106 Wu Lei and Shen Qinyu, “Will China and the US go to War over Oil,” Far East Economic Forum (Yuan dong 

jingji pinglun), April 13, 2006. Translated by John Keefer Douglas. 107 Larry M. Wortzel, “Introduction to U.S.-China Economic and Security Review Commission.” The Fletcher 

School. Medford, April 12, 2006; and also Chanlett-Avery. 

108 Xie Ye, “Energy bogey,” China Daily, June 6, 2005. 

109 Zhang Weiping. 
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23 U.S.-China Economic and Security Review Commission

regions of the world. However, some argue that China’s energy policy poses a threat to U.S. 

interests. Based on the analysis presented in the previous sections of this document, we make the 

following recommendations for American policymakers. 

Recommendation 1: View Chinese Oil Company Activities as Capitalist, not Mercantilist 

The Bush Administration argues that China’s neo-mercantilist strategies threaten American ‘oil 

security’ by ‘locking up’ resources, thereby threatening American access to this vital commodity. 

Other analysts point to the SCO as evidence of an emerging closed Asian ‘energy club.’ We 

view these analyses as flawed for both economic and security reasons. In today’s economic 

system, China’s oil companies could only lock up resources by consistently outbidding other 

international energy interests and paying above market rates. Such a policy, however, would 

strain China’s already heavily subsidized retail fuels market, lead to unnecessarily high oil prices, 

and harm to China’s overall economy. There are enough producers in the global oil market that 

China’s efforts to “lock up” resources are unlikely to keep the U.S. from getting what it needs. 

In the near term, continued supply is not a major concern—energy experts assert that current 

high oil prices are caused mainly by lack of infrastructure investment and complete reliance on 

Saudi Arabia as the only producer with any buffer of excess capacity—and not because America 

is losing access to oil.110 To the contrary, we believe that China’s aggressive upstream 

investment activity will increase international oil supplies to America’s economic benefit. 

China currently lacks either the means or the intention to intervene militarily in defense of its 

overseas interests. In practical terms, this means that any restriction in supply could produce 

serious consequences in China, especially since it has only just begun to create a strategic oil 

reserve. China admits it will not have capacity to project naval power to secure shipping lanes 

any time soon.111 Overland routes mitigate this, but China’s reticence to form strong military 

alliances, even in the context of the SCO, means that pipelines will be difficult to defend. Thus, 

China realizes its best hope in the current international climate is diplomacy, capitalist 

competition, and cooperative ventures to improve the quality and efficiency of the Chinese oil 

industry.112

Official Chinese statements on energy policy stress independence to the greatest extent possible, 

and where they must rely on imports, international cooperation to maintain secure supply—they 

take a “we’re all in this together” view. This forms a key area for engagement by U.S., stressing 

our common interests as consumers to make a push for security and peace in the Middle East.113 

China’s recent agreement with India designed to reduce competition over oil supply, and China’s 

willingness to cooperate with U.S. oil firms suggests this cooperation could be fruitful. 

 

110 “Two Cheers for Expensive Oil (petroleum crisis).” Leonardo Maugeri. Foreign Affairs 85.2 (March-April 

2006): p149. 

111 Chinese Ministry of Foreign Affairs press conference, December 2005. Translation by John Keefer Douglas. 112“China-US Energy Cooperation: Challenges and Opportunities” (Energy Bureau). 113Ministry of Foreign Affairs for the PRC. “Transcript of Premier Wen Jiabao's Press Conference in Cairo.” June 

19, 2006. Obtained from http://www.fmprc.gov.cn/eng/wjb/zzjg/xybfs/xwlb/t258665.htm, August 2006. Ministry 

of Foreign Affairs for the PRC. “President Hu Jintao Attends G8 Outreach Session and Delivers Important 

Speech.” July 18, 2006. Obtained from http://www.fmprc.gov.cn/eng/zxxx/t264518.htm, August 2006. 
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24 U.S.-China Economic and Security Review Commission

Recommendation 2: Promote Broad Chinese Investment 

The second common indictment against China is that its appetite for oil has led to closer political 

relationships with oil rich regimes that Secretary of State Rice asserts is “warping” China’s 

foreign policy.114 The need for oil gives the PRC an economic incentive to use its international 

influence in support of oil producing states. Here, we believe that the PRC has the potential to 

be either an ally or a counterweight to America’s political goals in the Middle East. To advance 

the potential for Chinese support, we make the following recommendation. 

We argue that allowing Chinese oil firms to participate in overseas upstream activities integrates 

them into the global economy in a way that serves to shape and constrain Chinese foreign policy. 

As China diversifies its oil supply network, it has less incentive to expend energy defending or 

securing any one of those suppliers. For instance, China must be cautious in its support of Iran 

for fear of disrupting its relationship with Saudi Arabia. Coaxing a rising China into ever-deeper 

economic commitments will lead to a complex web of economic involvement. The final result 

should be the emergence of a multiplicity of new viewpoints to be considered in their 

formulation of foreign policy, which will give them a greater stake in regional stability. 

Recommendation 3: Work to Secure the Interests of all Oil Dependent Economies 

China defines stability far differently than the United States. It is willing to provide economic 

and military assistance (in the form of arms sales) to brutal but stable regimes in this pursuit, but 

its willingness to get involved beyond this level (i.e. guarantees of Chinese military involvement) 

has thus far been limited. Should China put its military and diplomatic weight behind its oil 

suppliers, this would certainly pose a significant risk to U.S. interests and U.S. security. 

With China’s state owned firms investing in the energy infrastructure of Middle Eastern states, 

the PRC’s ability to stand clear of the internal affairs of the places in which they invest will be 

increasingly difficult. Eventually, Chinese oil firms will be faced with internal policies in some 

states that harm Chinese investments, and China will have to decide whether the principle of 

sovereignty – a core principle of China’s foreign policy – should be sacrificed to protect 

economic investments.115 Our research indicates that little serious thought has yet been given to 

the security implications of the stated goal to transform Chinese state-owned oil firms into true 

global players. This presents a strategic opportunity for the US in that China continues to 

depend on U.S. naval protection of major shipping lanes.116

 

114 Mufson. 115 China’s foreign policy reflects two primary principles. First, the PRC wants to be seen as a responsible great 

power, not a threat to be challenged. Second, the PRC believes it is essential to defend the integrity of state 

sovereignty. Both of these principles help China’s oil companies make major investments abroad without causing 

fear that Chinese interventionism will soon follow. 116 China’s increases in military spending may eventually produce a traditional security threat to U.S. interests in 

East and Pacific Asia. While it is difficult to guess the nature of secretive military spending in China, the power to 

project naval power in remote areas would require a much more visible build-up than is currently taking place. In 

this regard, military preparations probably still focus on the well-documented preparations for a possible war over 

Taiwan. Thom Shanker, “US Questions China on Arms Buildup,” The New York Times, May 24, 2006. 
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25 U.S.-China Economic and Security Review Commission

American policymakers should recognize that while Chinese commercial interests will 

increasingly call for the projection of Chinese power in the Middle East to protect their interests, 

Chinese power does not necessarily have to follow. Japan, the third largest importer of Middle 

Eastern oil, serves as an example. Like Japan, China currently receives the benefits of America’s 

naval presence, while the United States maintains unquestioned military superiority. If the 

United States can convince China of its ability to protect the interests of oil dependent states in 

the Middle East and on the high seas, it might avoid the emergence of Chinese force in the 

region. China may never be as satisfied with U.S. dominance as Japan; however, the U.S. could 

take steps to make it more palatable to China. Seeking to promote a high-profile joint venture 

exploration project in the Middle East between U.S. and Chinese oil firms would be one example 

of a confidence building strategy designed to demonstrate to Chinese policymakers that the U.S. 

accepts Chinese international investments. This may assuage some of China’s concern over the 

vulnerability of their foreign investments. 

Recommendation 4: Emphasize the Confluence of U.S. and Chinese Interests 

The U.S. must do all it can to pull China in the direction of using what power and influence it has 

as a responsible stakeholder in the international system, mostly because there is no feasible 

alternative. To this end, America must recognize that its current approach – to frequently scold 

China – has proven ineffective in Sudan, Iran, and even Zimbabwe. Chinese officials proudly 

put their nation’s own interests ahead of what they perceive to be America’s goals, and thus they 

continue to import Iran’s oil and welcome its President even as the UN Security Council 

considers sanctions. American policymakers must identify how this behavior undermines 

China’s interests, arguing that China is unnecessarily enriching those with a determined interest 

in undermining the international economic and political system that has given rise to both 

American and Chinese power. To counter China and Iran’s mutual philosophy of multi-polarity, 

American policy must advance international policies that protect the capitalist system and the 

preeminence of the UN Security Council. Finally, while both states recognize the threat of 

terrorism exported from the Middle East, and neither can afford such developments, the United 

States must make a stronger case that Iran, China’s long term friend, promotes the kind of 

instability feared by China. 

In conclusion, rapidly growing Chinese energy imports from the Middle East should be watched 

closely, but on their own do not constitute a threat to U.S. interests in the region. China has 

shown a pragmatism on its oil supply sources that is a positive signal of their intention to 

diversify supply without making strong commitments of political or military support to one state 

over any other. Moves to restrict Chinese investment in oil fields only serve to push China 

further away from the U.S., possibly to the point of contemplating retaliatory moves such as 

more material military support for anti-American regimes. Engagement and cooperation with 

China on energy development is a far better option; it can help keep the price of oil stable and 

mitigate China’s willingness to challenge the U.S. through support of states like Iran. Fears that 

China can “lock up” resources or create a military alliance in the SCO to rival NATO are 

significantly overblown. While Chinese military buildup is certainly cause for significant longterm concern, their activities in the Middle East do not yet constitute a real challenge to U.S. 

interests in the region. 
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26 U.S.-China Economic and Security Review Commission

Appendix: Chinese Security Policy and the Military Dimension of the SCO 

The public face of Chinese security strategy is inwardly focused. Chinese leaders continue to be 

adamant that increased defense spending is “in accordance with economic development, to be 

used mostly for pay raises and benefits to soldiers. Only a small percentage will be used for 

equipment [arms, new technology, etc.].”117 Nonetheless, significant doubts remain among 

western experts about hidden spending.118 It is only very recently that any public discussion has 

begun to emerge on the protection of Chinese interests abroad or the projection of Chinese power 

and influence beyond the border defined by long-standing claims of sovereignty over Taiwan 

and the South China Sea. Where this issue is discussed, it is recognized as beyond the scope of 

current capabilities, and something that can only receive proper focus when the primary goals of 

“territorial integrity” and political stability have been achieved.119 

In part, China’s internal focus reflects recognition that domestic political problems, such as 

consolidation of power over restive non-Han regions (Tibet, Xinjiang), and especially the 

Taiwan issue, must form the core of any short-term strategic thinking. This is not to say that 

discussions of overseas projection of military power are not taking place secretly within the halls 

of Chinese political and military power, only that to date their secrecy has remained remarkably 

complete. From the Chinese perspective, their military is not modernizing fast enough even to 

deal effectively with their primary concern of Taiwan, let alone to expand its power projection 

capabilities beyond the region: 

Military capabilities are lagging behind expansion of national interests. Major countries 

in the world are all increasing military spending, especially their information capability. 

The gap between developed and developing countries in military technology and 

capability is getting bigger. China still lacks the information capability to win a localized 

war, much less to live up to the fast expansion of national interests.120

While some discussion has taken place within China of the potential for non-traditional threats, 

such as the ideological threat posed by radical Islam and terrorism, it has mostly been in 

reference to possible threats inside Chinese territory (i.e. Xinjiang), not to Chinese interests 

abroad. China has been wary of trying to enlist the support of even its closest partners in 

traditional security concerns, preferring to keep them at arm’s length and focus on cooperation 

on other issues in the hope of building good will and allaying U.S. fears over Chinese designs on 

regional political/military dominance.121

 

117 Speech by Zhou Wenzhong, Chinese Ambassador to the US given at Georgetown University, October 5, 2005. 

Accessed on August 10, 2006 on Chinese Foreign Ministry website: 

http://www.fmprc.gov.cn/chn/wjb/zwjg/zwbd/t215308.htm. Translation by John Keefer Douglas 118 Carrie Gracie, “China’s Rise Leaves West Wondering,” BBC website, accessed August 12, 2006: 

http://news.bbc.co.uk/2/hi/asia-pacific/4797903.stm. Also, the 2006 US Defense Department report, “Military 

Power of the People's Republic of China,” states, “Estimates place Chinese defense expenditure at two to three times 

officially disclosed figures.” (p. 5) Accessed September 1, 2006, at 

http://www.defenselink.mil/pubs/pdfs/China%20Report%202006.pdf 119 Yang Yi. 120 Yang Yi. 121 Sun Xuefeng and Chen Hanxi, “The Strategic Impact of China's Regionalist Policy,” World Economy and 

Politics (Shijie jingji yu zhengzhi) 2006, no. 5. Translation by John Keefer Douglas. 
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27 U.S.-China Economic and Security Review Commission

In addition to internal Chinese defense policy, the SCO serves a security function for its member 

states, and the specter of a military alliance including China, Russia, and Iran has reportedly 

raised alarm in some hallways of the Pentagon.122 The SCO will hold joint “anti-terrorism” 

exercises next year in the Volga-Ural military district of Russia. The drills will be the first to 

involve all six SCO member countries, but they will not involve observer Iran. Although the 

scale of these activities has raised eyebrows, Chinese Foreign Minister Li Zhaoxing explains, 

“Such co-operation is strictly in line with the SCO's nature as a non-aligned organization which 

neither promotes confrontation nor targets any third country or organization.”123 Central Asia 

experts generally agree that SCO security cooperation does not represent an anti-western military 

alliance intended to challenge NATO.124

Despite assertions by experts after the 2006 SCO meetings, the SCO is far from being an antiAmerican military alliance through which China has exchanged security guarantees for Iranian 

oil. SCO members chose to delay the induction of new members, despite Iran’s application to 

join, demonstrating that the current SCO membership is wary of military cooperation with the 

Islamic Republic.125 

Even the six core SCO member states are hesitant to work together due to a long history of 

conflict. China and Russia remain mutually suspicious, and the four smaller states have not 

forgotten the period of Soviet domination from which they have recently emerged. In fact, 

NATO’s Partnership for Peace, to which all SCO members other than China and Russia belong, 

continues to play an active role in central Asia, and in September 2006 NATO will conduct 

“Steppe Eagle” military exercises in Kazakhstan, a major oil producer (forecast to produce more 

than Iran by 2012) with which the U.S. is eager to expand relations.126 As scholar J. Brandon 

Gentry pointed out in 2005, the SCO is “a potential challenge to U.S. interests, but one which is 

in danger of being pulled apart by disparate aims and pressing economic limitations.”127

 

122 Steven R. Weisman, “As the Price of Oil Soars, So Does Its Power to Shape Politics From Washington to 

Beijing,” The New York Times, July 25, 2006. 123 Xing Zhigang, “SCO 'does not target any country'- FM,” China Daily, Updated: June 13, 2006. 124 For instance, Kirill Nourzhanov, of Australian National University, told The Financial Times: "The image of a 

mighty and organically anti-western military alliance is misleading.” Geoff Dyer and Richard McGregor, 

“Opposition to US inspires 'Nato of the east' Is the Shanghai Co-operation Organisation a threat to the west?” 

Financial Times (London, England) June 22, 2006. 125 Rowan Callick, “Shanghai group's power play,” The Australian (Australia), June 16, 2006. 126 Vice President Cheney and Secretary of State Condoleezza Rice recently visited and praised the government. 

President Nursultan Nazarbayev is scheduled to visit Washington to meet with President Bush in September. “Vice 

President Cheney to visit Kazakhstan in May,” News Bulletin of the Embassy of the Republic of Kazakhstan, No16, 

April 25, 2006; Ariel Cohen. 

127 Gentry. 
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