China, the Red Sea, and Trade

By Stephen Bryen SUBSTACK                                       27 January 2024

The Chinese are increasingly angry with Iran.  Reuters has reported that Chinese officials have asked Iran “to rein in attacks on ships in the Red Sea by the Iran-backed Houthis, or risk harming business relations with Beijing.”

That may not sound like much of a threat, but the hidden text is that a lot of the parts for Iranian missiles and drones, and equipment for its large scale nuclear program, come from China.  If China actually cut these supplies off, Iran would have to close its war factories.  The Chinese would do what US export controls completely failed in doing: shutting down Chinese access to technology from Asia, the United States and Europe.

More than one Maersk line ship has been hit by Houthi missiles. The company has against suspended Red Sea transits.

It would also hit Russia hard.  Russia is buying drones and drone components from Iran.  Yes, Russia could get stuff from China, but the Chinese have been anxious to avoid western sanctions, so they have been careful on what they feed the Big Bear, and they prefer an approach to under the table transactions that, in Chinese terms, appears to resemble plausible deniability.

China has even more reason than just armaments to be unhappy with the Houthis.

Europe is one of China’s largest trading partners.  China’s share of imports into Europe rose from 4.6% in 2020 to over 20% today.  But the real share is even higher, since a big part of imports to Europe other than from China is in the form of energy (oil, natural gas), including from Russia even now.  China’s imports are made up of a combination of some specialized raw materials (lithium and other rare earths) and the rest mostly manufactured goods.

China is undergoing a serious economic recession, with factories shut down, workers released or paroled, and sales inside and outside China very sluggish.  Compounding the problem is that China ships its goods using commercial carriers, and most of these shipments are by sea and pass through the Red Sea to the Suez Canal and on to Europe.

Even if the Houthis say they are not shooting at Chinese ships, that is completely irrelevant, since non-Chinese ships by and large carry Chinese cargo.  And even if ships keep using the Suez Canal, insurance rates are rising.  So the cost of transport, and if diverting around the horn of Africa, the weeks of delays in moving cargoes, is a big challenge for Chinese producers. China simply cannot afford to lose any more business than it already has.

A British oil tanker was set ablaze off the coast of Hodeida, in Red Sea Yemen following a missile strike by Ansarullah (generally referred to as Houthis in Western media)

If Xi Jinping does not take even tougher measures on Iran, then he will be held responsible by China’s manufacturing elites for an even bigger failure.  He already has a host of disasters on his hands, much of it, like the crazy Covid restrictions, his own doing.  His real estate market has collapsed.  Fancy and not so fancy cars are piling up in holding yards because Chinese entrepreneurs and higher level government personnel have lost confidence and are holding onto their money, not in banks but in mattresses.

Cars await loading onto a ship for export in Yantai port in east China’s Shandong Province, May 9, 2023/Xinhua

China had big ambitions to flood Europe with its new generation of battery powered cars.  Many articles have been written about these fancy vehicles, although reporting inside China is far more critical.  Nevertheless, as Europe, especially Germany, deindustrialized, China saw an opportunity to replace European automobiles with their own brands.

Worse yet, at the same time that trade through the Red Sea and Suez Canal may be impractical, China’s Belt and Road initiative appears to be collapsing.  That entire system was founded in many cases on bribing local political leaders, especially in Asia and Africa, financing and building projects the recipients could never afford, and then taking over critical assets such as ports, roads, air terminals and other infrastructure, as a way of getting payment.  For these countries it isn’t sustainable: in fact, it is the modern equivalent of exploitative colonialism.  Belt and Road, instead of enhancing China’s global power, is undermining its influence and reach.

The Iranians, who energized the Houthis to carry out attacks on Red Sea shipping, have to a degree cut off their nose to spite their face.  They have been behaving in a more ruthless manner in the region, sponsoring the Hamas war, promoting Hezbollah, putting Revolutionary Guard personnel in Iraq and Syria, supplying almost all the weapons for these forces, and basically running the Middle East because Washington no longer cares, except to pretend it is a great power and to issue pronunciamentos which it has has no intention of enforcing.  Carrying out “surgical strikes” that are “proportional” against “objects” in Houthiland no doubt has inspired a new genre of Middle Eastern humor, soon to replace the all-famous Armenian Radio (Radio Yerevan) of Soviet times.