U.S. Treasury Secretary Timothy Geithner urged top Chinese officials to greatly reduce China's imports of Iranian crude oil, and explained to them a new U.S. sanctions policy against countries that don't curtail their purchases.
"We are in the early stages of a broad global diplomatic effort to take advantage of this new legislation to significantly intensify the pressure on Iran," a senior U.S. official said. "We are telling them [the Chinese] what's important to us and they are listening."
The senior U.S. official added that "We have a reasonable shot at getting a number of countries to wean themselves off Iranian oil."
It is far from clear whether the Chinese will go along with the sanctions regime. Faced with U.S. initiatives, Chinese officials customarily listen and weigh the alternatives but take months before making their decision clear.
In public, Chinese officials have forcefully opposed unilateral U.S. sanctions on Iran. However U.S. officials tend to discount Chinese public statements and watch what Beijing does.
The U.S. believes that Beijing has taken steps to rein in companies that do business with Iranian firms that could be involved in Iran's nuclear program. But U.S. officials aren't sure whether a recent slowdown in Chinese purchases of Iranian crude represents a political signal from China about its willingness to follow the U.S. lead or is simply the result of a commercial dispute between Chinese and Iranian energy firms.
The U.S. sanctions policy is aimed at sharply reducing Iran's exports to its biggest markets, including big Asian nations such as China, India, Japan and South Korea. A new law would bar from U.S. financial markets foreign financial institutions that do business with Iran's central bank, which plays a critical role in facilitating foreign trade. One way for a nation to get an exemption is to show a "significant reduction" in Iranian oil imports.
On other matters, Mr. Geithner argued that China should continue to let its currency appreciate.
The Chinese "talk about continued appreciation," the U.S. senior official said. "They recognize that their growth strategy leaves them too dependent on external demand" and so needs to be altered.
A number of analysts expect China to reduce the rate of yuan appreciation versus the dollar this year to about 2% to 3%, compared with about 5% last year.
In a brief public statement on Wednesday, Mr. Geithner was complimentary of Beijing's policies. "On economic growth, financial stability around the world, on nonproliferation, we have what we view as a very strong relationship with your government and we're looking forward to building on that," Mr. Geithner said before meeting Chinese Vice President Xi Jinping.
Mr. Xi is expected to become China's Communist Party chief later this year and assume the presidency in 2013. Mr. Geithner also met on Wednesday with Premier Wen Jiabao, and Vice Premiers Li Keqiang and Wang Qishan.
Mr. Wen told Mr. Geithner that the global economic situation is "highly complex." He added that "I always believe when it comes to China and the U.S., dialogue works better than confrontation, and cooperation works better than containment."
In private, the U.S. had a broad agenda for Mr. Geithner's visit, including Iranian oil imports, the economic situation in Europe and the continued appreciation of the yuan.
Mr. Geithner wasn't expected to discuss a new Obama administration plan to create a government panel to focus on trade issues with China. That initiative, along with other trade issues, was the subject of discussions in Beijing between White House aide Michael Froman, Treasury undersecretary Lael Brainard and Chinese officials.
China's agenda included pressing the U.S. to reduce restrictions on high-tech exports and to encourage Chinese investment in the U.S. The U.S. generally tries to turn those conversations into a discussion of how China needs to tighten its protection on intellectual property, so U.S. firms will feel more comfortable sharing cutting edge technology with Chinese firms.
The U.S. is looking to cripple Iran's oil industry as a way to persuade the nation to scrap a nuclear weapons program. Iran denies it is developing nuclear weapons.
Financial institutions have six months to comply before the U.S. decides whether to impose sanctions—putting the decision in the middle of the U.S. election season. For the U.S. and Asian nations, the sanctions decision will require perilous political calculations. If President Obama shies away from imposing sanctions, he could be hammered by his political opponents for failing to do enough to curb Iran's nuclear program.
But imposing sanctions on China, the world's second largest economy and one of the few fast-growing ones, would threaten relations with Beijing and complicate Mr. Obama's plans to have the U.S. focus on Asia politically and economically.
For China, cutting imports from Iran could open the leadership to criticism it is caving into U.S. pressure. Beijing is going through its own leadership change this year and next and none of the leaders want to look weak. But failing to cut imports could harm relations with the U.S., its most important economic partner.
Chinese Premier Wen Jiabao is scheduled to visit the Middle East soon, which U.S. officials interpret as an effort to diversify China's oil supplies, so it isn't so reliant on Iran. About 11% of China's crude oil imports come from Iran.
For Japan and South Korea, the incentive to comply with U.S. wishes is much greater because they are U.S. allies and depend on U.S. military power. Even so, officials in both nations are unhappy with the new U.S. push. "We are concerned about an impact on global energy prices," an official at Japan's Ministry of Foreign Affairs said Wednesday. "We are also worried about how a fuel shortage might impact rebuilding" after the massive earthquake and tsunami that hit Japan in March.
Still, Japan's Minister of Foreign Affairs Koichiro Gemba is touring the Middle East this week, asking major oil-producing countries, including Saudi Arabia and the United Arab Emirates, to increase oil production in order to stabilize prices, and urging Iran to back down from its threats to close the strategic Strait of Hormuz in case of an embargo on Iranian crude exports.
Mr. Geithner heads to Tokyo on Wednesday to discuss the Iran issue and other economic matters.
Mr. Geithner is delivering a "very tough message," said U.S. energy analyst Philip Verleger, " 'You are with us or you are against us.'"
Saudi Arabia, a rival of Iran's, is likely to pick up exports to make up for any loss of Iranian crude.
One possibility is that some countries will shift to barter deals with Iran, which wouldn't require energy firms to use their home banks or other institutions that deal with Iran's central bank. Iraq depended on barter sales of oil when it too was faced international sanctions during the reign of Saddam Hussein. "I believe China is trying to set up some barter deals—and is probably getting a 50% discount," said Mr. Verleger.
Iran would be under great pressure to cut prices to assure it can sell its crude.
One area where China and the U.S. seem to agree is how to handle Europe. Both are dissatisfied with the size of the bailout fund put together by European nations and the time it has taken for the Europeans to get the fund running. China has said it would make contributions to the International Monetary Fund to boost its ability to make emergency loans to Europe and elsewhere, but has said it was waiting for the Europeans to finalize the plans for its own rescue funds.
According to a Western official in Beijing, China also has been waiting for the U.S. to give its go-ahead to the IMF to create a new fund. The U.S. has withheld that approval as a way to put pressure on the Europeans to act.
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