BEIJING (Reuters) - China faces more challenges than ever in its Iran policy this year as Washington and its allies move to impose tougher sanctions in an effort to rein in Tehran's nuclear activities, a former Chinese ambassador said.
New financial curbs signed into law by U.S. President Barack Obama on New Year's Eve are aimed at making it difficult for most countries to buy Iranian oil. The European Union, which agreed in principle to a ban on Iranian oil last week, is expected to announce its own tough measures later this month.
China is Iran's top trade partner, with bilateral trade likely to top $40 billion in 2011. Iran is also the No.3 oil supplier to China, which buys over 20 percent of its crude exports and is opposed to further sanctions.
Beijing faces rising pressure from Western powers and their Middle Eastern supporters to help rein in Iran's nuclear activities, which they say appear bent on acquiring the ability to make atomic weapons.
"Iran will expect China to support its interests at the UN and other international circumstances, while the U.S. will exert tremendous pressure on China and use the Iran issue to judge if China is a 'responsible' major power," said Hua Liming, ambassador to Iran from 1991-1995.
"China will need to strike a balance in this dilemma."
Most oil traders believe Iran will still be able to find buyers for its 2.6 million barrels-a-day exports, at least for now. But it may have to offer steep discounts that reduce the revenue it needs to feed its 74 million people.
China could be among the main takers of such "discounted Iranian oil" if the EU voluntarily cuts purchases and other Asian buyers -- Japan, South Korea and India -- cave to U.S. pressure and follow suit.
Asked if China would take Iranian oil at a discount, Hua, now a senior researcher with the China Institute of International Studies, a think-tank for the Foreign Ministry, said he wouldn't speculate but suggested China would not bow to U.S. pressure.
"What I can say for sure is China is not going to sacrifice its national economic interest in answer to a big power."
China already felt compromised by voting in favour of the four rounds of UN sanctions between 2006 and 2010, he said. Washington and its allies say Iran wants to make an atomic bomb, but Iran says the program is peaceful.
"The previous rounds of sanctions have already hit China. Our top energy firms' business in Iran has skidded nearly to a halt," said Hua.
China's CNPC, Sinopec and CNOOC have either quit or scaled back investment on premium Iranian energy projects such as North Pars, South Pars gas ventures and Yadavaran oilfield, worried that they could be become targets of U.S. sanctions.
As for driving a hard bargain on Iranian oil, Hua said, "under normal circumstances, it's hard to drive even a one-cent bargain with the Iranians."
SANCTIONS WON'T HAVE INTENDED RESULT
Hua, 73, was among China's first batch of government-sponsored students in the late 1950s to receive formal training in Persian, or Farsi, the official Iranian language. He went on his first Iranian assignment in 1978-1984, witnessing the Islamic Revolution in 1979 and then the Iraq-Iran war.
Hua said the new round of sanctions, with more teeth than any of the previous rounds, would cut Iran's oil income, which makes up half of Tehran's revenue, but it was impossible to force Iran to give up its nuclear ambitions.
"If you look back on all the U.S. sanction since WWII, there has been no such precedent that you can force a nation to surrender through sanctions. Especially countries like Iran.
"The West has an illusion that a pro-West regime would give up the nuclear plan. But in Iran, no matter which regime comes to power, they will not give up.
"To become a nuclear power is many Iranians' dream of a strong nation," said Hua, who last visited Tehran for an international seminar in 2008.
The Obama administration had turned up the heat on Iran under mounting domestic pressure in election year, Hua said.
"Whether the sanctions work depends a lot on domestic U.S. politics in 2012. If Obama succeeds in bringing down unemployment to below 9 percent, he will have room to moderate his Iran policy.
"But if domestic economy fails to improve, China and Iran, in particular, will become main source of distraction from domestic politics."
And for the sanctions to work effectively, the United States needed support from major powers including Russia and China, which Hua expected would remain opposed to the new sanctions.
"I don't think the U.S. is hopeful of winning support from the Security Council for the new round of sanctions."
(Reporting by Chen Aizhu; Editing by Don Durfee and Nick Macfie)