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Decoding China’s Diplomatic Policy for Investors

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Jan. 26 2016, Updated 9:28 a.m. ET

China’s diplomatic policy

A week after the sanctions on Iran were lifted, the growing closeness between China and Iran points toward the start of a new economic alliance. Investors should note that China was previously importing crude oil from Iran even during the sanctions. Experts believe that China has developed diplomatic ties with those countries having political problems with the United States (SPY). Energy demand is a critical component of national security. Although China’s development of close relations with Saudi Arabia instead of with Iran has political implications, there shouldn’t be much impact on crude oil production, as Iran mostly likely won’t cut its production. Lower crude oil prices may give a boost to the Chinese economy, which is struggling with earnings headwinds.

[marketrealist-chart id=996859]

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What the deal means for China’s future

Moreover, choosing Iran over Saudi Arabia ensures a strong natural gas partner for future requirements. Chinese companies may engage in developing crude oil and natural gas fields in Iran. The trade deal ensures that Chinese players can compete for the development of Iran’s nonrenewable output. As Iran plans to diversify its economy, Chinese investors can seek different investment avenues in Iran.

CNOOC (CEO), China Petroleum & Chemical Corporation (SNP), and PetroChina (PTR) represent the large cap Chinese ADRs (American depositary receipts) in the oil and gas sector. China Petroleum & Chemical Corporation and PetroChina are integrated oil and gas companies, and CNOOC operates only in the upstream offshore sector. The graph above shows the performance of the iShares China Large-Cap ETF (FXI) in comparison to that of the United States Oil Fund (USO).

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