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Houston — **China may offer US sanctions compliance for trade concessions

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**Chinese imports of Iranian crude up 6% from 2017

**Domestic banks, barter system may be used to evade sanctions

China, Iran's top oil consumer, will likely attempt to evade sanctionsthat the US has promised to reimpose in November, but ongoing tradedisputes and sensitive diplomatic talks could motivate Beijing intolimited compliance, analysts told S&P Global Platts this week.

"I do think the Chinese are going to evade US sanctions and even justignore some of them," said Richard Nephew, a principal deputy coordinatorfor sanctions policy at the State Department during the Obamaadministration. "But, depending on how North Korea and other trade issuesare going, they may (I must emphasize, may) throw a few bones to theTrump Administration by reducing a bit of their purchases, cooperating onthis or that evasion case, etc."

Another former State Department official said that China would notcooperate with reimposed sanctions unless they got a "big concession"from the Trump administration, likely within the brewing US-China tradewar.

The seemingly unrelated trade disputes, including steel and aluminumtariffs, denuclearization talks with North Korea and the ongoing fightover control of the South China Sea, could all impact how much, or howlittle, China complies with US sanctions on Iran, according to Amy MyersJaffe, director of the Council on Foreign Relations' energy security andclimate program.

"It's hard to see that China would just shaft the United States' concernsabout Iran given the fact that there are so many other moving pieces inthe China-US relationship," Myers Jaffe said in an interview with thePlatts Capitol Crude podcast. "If you're the leadership in Beijing isthis an issue you want to have a conflict with the US over given all theother things on the plate?"

Myers Jaffe, who thinks US sanctions on Iranian oil buyers could takemore than 1 million b/d off the market, expects China to reach a dealwith the US on reducing its Iranian imports.

US Secretary of State Mike Pompeo could discuss such a deal during avisit to Beijing scheduled for Thursday. A State Department spokeswomandeclined to comment Wednesday.

In May, China imported an average of 636,548 b/d of Iranian crude andcondensate, the most of any nation in the world, but down from 714,467b/d in April, according to Platts estimates.

Through the first five months of 2018, China has imported an average of637,121 b/d of Iranian crude, up nearly 6% from its full 2017 average of602,259 b/d.

COOPERATION NOW LESS CLEAR

Nephew, now a senior research scholar at Columbia University's Center onGlobal Energy Policy, said the Obama administration had "relativelymodest expectations" of China when sanctions on Iran were imposed in 2012under the Joint Comprehensive Plan of Action, which Trump announced lastmonth the US was exiting.

"We expected China to reduce purchases with Iran significantly, but inkeeping with their overall amounts," Nephew said. "We expected them toresist doing big things but cooperate on policing some bad behavior onthe part of their industries, and they did that too. All in all, it was acontentious relationship on this score but one that we made productive."

But cooperation from China is less clear following the US exist from thenuclear deal, analysts said.

"They did not fully comply the last time when there was much moreinternational consensus on the use of sanctions on Iran," said JaneNakano, a senior fellow in the Center for Strategic and InternationalStudies' energy and national security program. "The right question seemsto be where along the scale of 100% compliance to 100% non-complianceChina will be this time."

It also seems to no longer be a question of whether China will evadesanctions, but how.

The former State Department official said China may "hide" their importdata, possibly by masking purchases through military companies, making itdifficult to determine how much Iranian crude it is bringing in. Inaddition, China may further move its oil purchases to Chinese renminbiand transact only through designated banks, such as its domestic Kunlunbank, the former official said.

This would create problems for both China, since it would be difficult toavoid interacting with the US financial system, and Iran, since it cannotcover expenses in Chinese renminbi currency, according to Ellen Wald,president of Transversal Consulting.

"I see a possibility that the US could waive sanctions for certainChinese banks in return for concessions in US-China trade negotiations orfurther help with North Korea," Wald said.

Wald said China and Iran may develop a payment structure outside thebanking system.

"China is heavily involved in Iran in areas outside of oil. Chinese statecompanies are involved in revamping Iranian transit systems and havecontracts for major projects and items such as subway cars," Wald said."It's possible that Iran and China could work out a quasi-barter systemin which Iran foregoes a currency payment for oil provided to China whileChina pays its own contractors to provide services for Iran."

On Sunday, Iranian President Hassan Rouhani and Chinese President XiJinping agreed to enhance bilateral pragmatic cooperation and pursuecomprehensive strategic partnership, according to China's state-ownedXinhua news agency. --Brian Scheid, brian.scheid@spglobal.com

--Meghan Gordon, meghan.gordon@spglobal.com

--Edited by Jeff Mower, newsdesk@spglobal.com