Talking Point

China’s riskiest investment

The economic stakes are high for Beijing as Iraq descends into chaos

A member of Kurdish security forces takes up position with his weapon as he guards an oil refinery on the outskirts of Mosul

At risk: all three of China’s oil majors are producing oil in Iraq

As General Tommy Franks weighed up the options for toppling Saddam Hussein, it was evident that Plan Blue didn’t hold much appeal. Authors Michael Gordon and Bernard Trainor make this clear in their excellent account of the second Iraq war, Cobra II: The Inside Story of the Invasion and Occupation of Iraq.

“Franks was not enthusiastic about the idea of only pounding Iraq from the air. That seemed like a throwback to the Clinton-era strategy and was unlikely to seal the fate of Saddam’s regime. Franks put the point more colourfully in a meeting with his commanders: ‘[Plan] Blue is like peeing on yourself in a dark suit. It feels good, but nobody notices.’”

Franks favoured a full-scale land invasion. Combined with overwhelming air and naval power, he was certain that it would deal a devastating blow. And just ahead of ordering the offensive in 2003, Franks again met with his generals. But this time he opted for loftier rhetoric: “There is a long road in front of us, but we have the best team in history. Welcome to history.”

It’s unlikely that Franks anticipated quite how long that road was going to be. But he was right that the invasion would have historic consequences. The most far-reaching is that it has unleashed centuries-old sectarian hatreds between the country’s Sunni and Shia Muslims.

Indeed, a decade on, and events in Iraq have burst back into the headlines as the fighters of the Islamic State of Iraq and Levant (known as ISIS) rampage through the north of the country. Their capture this month of Iraq’s second city Mosul stunned the nation’s government.

The extremist Sunni Muslim group has made plain it wants to resurrect a caliphate based in Baghdad, and destroy sacred Shia shrines in Najaf and Karbala too.

This soon led to speculation that the American military would have to return to Iraq once again. But it also raises questions about China’s stance. Back in 2003 Beijing opposed the US-led invasion. However, at that time Baghdad was neither a strategic nor an economic priority. Today – as Iraq looks to be descending into civil war and a possible three-way partition between Shias, Sunnis and Kurds – Beijing has a lot more at stake. Will it be prompted to act differently this time around?

How invested in Iraq is China?

Chinese firms have invested heavily in rebuilding the Iraqi economy. According to China Daily, there are at least 10,000 Chinese workers in the country, and their employers have been drawing up evacuation plans should the country be overrun by ISIS militias.

One such firm is Shanghai Electric Power which employs 2,200 Chinese workers in Iraq, supplying electricity to Baghdad. Cao Lijun, a company manager, said power supplies to the capital would be greatly disrupted if staff were evacuated, and also told the China Daily that a withdrawal “will bring huge losses for our company”.

Cao told the newspaper that $2.1 billion had already been spent on the utility’s Iraqi infrastructure, with a second phase of investment scheduled to be completed by the end of the year.

Among the other larger Chinese firms to have made substantial commitments to their Iraq operations is Sinohydro (for more on this company, see WiC210). It has 409 staff in Iraq working on four separate projects. Most of these are in the south and have been unaffected by the ISIS surge so far, but a local manager said some projects are being suspended due to the insurgency.

Beijing Youth Daily reports that smaller Chinese businesses are already quitting the country. It spoke to Chen Xianzhong, who said that he had shut down his shopping mall and has hired local security guards to protect his personal property. Now safely back in China, Chen says he will also close his hotel and restaurant if things worsen. He adds that many of his compatriots in the Baghdad business community – primarily importers of Chinese consumer goods – have also left because they have “a premonition of chaos in Iraq”.

The biggest single area of concern for Beijing is the oil sector. China now buys 1.5 million barrels of Iraqi oil every day, almost half the country’s daily production. Oil imports have been growing fast too: last year they rose by 50%, ranking Iraq just behind Russia as China’s fifth largest source of crude. And thanks to the scale of its oil reserves, Iraq’s production levels were expected to keep rising, a welcome prospect for the Chinese.

That explains why all three of China’s oil majors have invested large sums in the country. CNPC, for example, has put at least $4 billion into Iraqi production (some of it via its listed entity PetroChina). Projects in southern Iraq include oilfields in Halfaya, Rumaila and West Qurna. Its most northerly drilling operation is in Al Ahdab, which is 110 miles southeast of Baghdad.

So far CNPC’s production has been unaffected, and it hasn’t evacuated any staff, but Century Weekly reports that an employee was kidnapped on June 12 from the Halfaya oilfield. (The staffer has since been released and a source told the magazine that the incident was related to a local tribal conflict.)

CNOOC also has an interest in Iraq. After it purchased the Turkish firm TPAO in 2009 it became the operator of the Maysan field.

Similarly Sinopec’s purchase of Addax in the same year brought ownership of an oil field in Kirkuk, currently protected from ISIS by Kurdish forces.

Until the recent turmoil, the firms’ push into Iraq had seemed to be progressing well. CNPC has enjoyed an especially favourable relationship with the government of Nouri al-Maliki as the leading foreign investor in Baghdad’s oil industry. The Atlantic magazine even headlined an article last year “Who won the Iraq war? China”, suggesting that it was one of the conflict’s “grim ironies” that the Chinese had come away with the lion’s share of the oil deals while the US was stuck with the $800-billion bill for invading and policing the country.

But as the New York Times points out: “Now, CNPC’s acceptance of risk is being tested as it anxiously watches the growing Iraq crisis.”

What about the Chinese response?

So far it has been calm and measured. Foreign ministry spokeswoman Hua Chunying told media that Chinese nationals reside mostly in relatively safe areas of Iraq, but she did add a request: “We hope that the Iraqi side could take concrete measures to ensure the security of Chinese institutions and personnel.”

In the meantime Beijing will maintain its role of helpful partner to Baghdad, Hua claimed. “China is willing to continue to provide assistance to Iraq at the request of the Iraqi side in antiterrorism and reconstruction works,” she said.

Foreign media has been surprised by this low-key response.

As online magazine The Diplomat put it: “Hua’s remarks are amazingly concise and unremarkable given that it’s been well over a week since Sunni militants began taking control over large parts of the country.”

Indeed, ISIS now controls territory stretching about 1,000 kilometres from east to west. And as the Financial Times points out, ISIS leaders also target oil assets. For example, in Raqqah in Syria, ISIS is extracting and selling 30,000 barrels daily from a captured field.

That begs the question: should the Chinese not be more concerned that ISIS will seize their own oilfield investments in Iraq?

Gordon Chang thinks so…

Chang – a consistent China critic – penned a widely-discussed column in Forbes last week saying that China will need to consider military action if it is to protect its economic interests in Iraq.

Provocatively titled “If anyone bombs Iraq, shouldn’t it be China?”, Chang notes that “Beijing has a lot riding on the outcome in Iraq”. Washington must realise this too, he thinks. Why not let China “put her navy in harm’s way,” he asks? “After all, China has far more at stake in Iraq than America”.

Chang is known for his strong views, including the bearish book The Coming Collapse of China, published in 2001. That makes him a bugbear for the state media and his ‘invade Iraq’ column has attracted widespread attention.

The Global Times – scoffing that Chang has repeatedly been wrong in his forecast of a Chinese ‘collapse’ – dismisses his call for military intervention. The dispatch of troops “can never become a Chinese option… We will never send planes, tanks or warships to fight there, but we will provide help rather than force to instill our will,” the newspaper promised.

Likewise it warns its readers not to be “fooled” by Chang’s argument, preferring to remind them: “The US bears the primary responsibility for today’s chaos in Iraq.”

That’s a sentiment shared by the popular (and fairly nationalistic) website Global Military Reports. Its own critique goes further than the newspaper’s, apparently assuming that Chang’s column was sanctioned by the US government itself. In fact, the website believes that Washington “wants to throw the mess in Iraq to China so as to delay China’s normal development.” Again, it reminds its audience that the Americans are “inevitably to blame” for the chaos. “Thus the main responsibility for helping to restore stability in Iraq and combating ISIS forces should be taken by the United States,” it concludes.

Many netizens agreed, opting for a broadly anti-American approach. “This is America’s human rights record,” wrote one, “turning a sound country with different political views into such a mess.”

Or as another put it: “Where there is the United States, there is civil war, such as Libya, Syria, then Ukraine, and now Iraq.”

It isn’t just the armchair strategists who hold such strong views. Yu Jianhua, an academic with the Shanghai Academy of Social Sciences, wrote: “The United States promoted – by force – regime change in the Middle East regardless of the actual situation of local social development, while blindly implementing the Western model. This broke the political and strategic balance in the Middle East, leading to the chaos in Iraq today.”

Back on the patriotic Global Military Reports website, the authors found themselves in the odd position of arguing that China’s weakness makes military intervention in Iraq impossible.

Why?

First, China “currently” lacks bases in the Indian Ocean and the Middle East. Should Beijing send aircraft from runways in its most westerly territory, they’d have to cover a distance of 3000km, “far beyond the combat scope of China’s warplanes”.

Second, China only has one aircraft carrier and the website says it’s more of a training vessel. At the moment it doesn’t support “fully formed” combat aircraft. Besides, China lacks sufficient ocean-going supply ships. Nor do its destroyers have cruise missile capacity.

“Thus, from the military point of view, China’s navy and airforce are not yet able to assume the task of interfering in Iraq,” is the website’s final assessment.

(It then makes clear its real agenda, adding: “Of course, the above analysis also highlights the necessity and urgency for China to vigorously develop equipment and combat forces including aircraft carriers, offshore supply ships, cruise missile submarines and so on in current and future periods.”)

How else might ISIS damage Chinese interests?

The current concern relates mostly to the billions of dollars of investment in the oil sector, where Chinese companies have signed deals that give them the right to develop Iraqi fields for the next couple of decades.

But there is anxiety about ISIS that runs closer to home too. With regular reports of ethnic unrest in the restive region of Xinjiang, Beijing is increasingly alert to the dangers of Islamic terrorism within its own borders, and loathes the violent brand of separatism so enthusiastically espoused by ISIS.

As the Diplomat notes: “We shouldn’t assume that China’s only interest in Iraq is keeping the oil flowing. Indeed, China’s security concerns are more and more tied up with stemming the growing influence of terrorist groups. Beijing sees a connection between global terror networks and domestic terrorism by Xinjiang militants, and thus China is invested in global anti-terrorism efforts. China remains especially concerned about the fate of Afghanistan after the US drawdown, and Iraq’s fall is viewed as potential foreshadowing for Afghanistan’s fate.”

Indeed, a televised confession on state broadcaster CCTV shows that Beijing wants to draw attention to its confrontation with jihadist violence in Xinjiang.

In the footage, a 19 year-old Muslim Uighur man involved in an axe attack in Hotan apologises for his behaviour and tells viewers that he was recruited by a terrorist ringleader named Abduzahir.

“He told me about jihad,” the man said on camera. “He said those who wage a holy war and die for it won’t be judged after death and will go directly to heaven.”

Separately, the Wall Street Journal reports that videos have been appearing online in Xinjiang, telling its 10 million Uighurs to rise up against “Chinese aggressors” in “blessed jihadist acts”. One video shows how to make a suitcase bomb, and looks much like those that emanate from the Middle East, says the US paper – it has a soundtrack featuring “an Arabic chant inciting holy war”. All this underscores why Beijing is uneasy about the rapid deterioration of the situation in Iraq. If ISIS continues to make gains there, it could embolden extremists elsewhere…


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