China and Iran are reported to have quietly drafted a comprehensive military and oil investment treaty worth $400 million that aims to end the economic isolation of the Islamic Republic.

As part of the agreement, China will pour investments into Iran’s key sectors — such as energy and infrastructure — over the next 25 years in what is bound to infuriate the US as it tries to squeeze the Iranian economy for its alleged pursuit of a nuclear and ballistic missiles programme.

According to US officials, it would also make way for Chinese military bases in Iran, fundamentally changing the region’s geopolitical landscape.

The partnership, detailed in an 18-page proposed agreement obtained by The New York Times, would vastly expand Chinese presence in banking, telecommunications, ports, railways and dozens of other projects in Iran.

China would receive a regular — and, according to an Iranian official and an oil trader, heavily discounted — supply of Iranian oil over the next 25 years, the New York Times reported.

The document also describes deepening military co-operation, potentially giving China a foothold in a region that has been a strategic preoccupation of the US for decades.

It calls for joint training and exercises, joint research and weapons development and intelligence sharing — all to fight what the documents terms as “the lopsided battle with terrorism, drug and human trafficking and cross-border crimes".

The partnership — first proposed by Chinese President Xi Jinping during a visit to Iran in 2016 — was approved by Iran's President Hassan Rouhani’s Cabinet in June, Iran’s Foreign Minister Mohammad Javad Zarif said last week.

It has yet to be passed on to Iran’s parliament for approval or made public, fuelling suspicions in Iran about how much the government is preparing to give away to China.

Iran has denied leasing the Persian Gulf island of Kish to China under the deal.

Chinese officials have not disclosed the terms of the agreement, and it is not clear whether Xi’s government has signed off or, if it has, when it might make an announcement.

If put into effect as detailed, the partnership would create new and potentially dangerous flash points in the deteriorating relationship between China and the US.

It represents a major blow to US President Donald Trump's tough economic sanctions on Iran since abandoning a landmark nuclear deal reached in 2015 by then-president Barack Obama and the leaders of six other nations.

The sanctions have decimated Iranian oil exports, which have plummeted to around 200,000 barrels per day from a pre-sanction level of 2.5 million bpd.

Iran’s access to international banking has also been significantly curtailed, resulting in severe hard currency shortages that have sent the national currency, the rial, plunging to a record low against the US dollar and other major currencies.

The pace of decline has quickened in recent weeks amid a surge in local Covid-19 cases, which have prompted neighbouring countries to close their borders to Iranian goods and farm produce.

It remains to be seen whether China will defy the US in firming up the agreement since it would risk angering Washington, which has vowed to cripple the Iranian economy and cut it off from the rest of the world until Tehran agrees to a more favourable nuclear deal to ensure Tehran will never emerge as an atomic power with ballistic missile capability.

Chinese oil companies were forced to abandon developing major oil and gas fields in Iran following Trump’s decision to ditch the 2015 nuclear deal.

“The United States will continue to impose costs on Chinese companies that aid Iran, the world’s largest state sponsor of terrorism,” a State Department spokeswoman wrote in response to questions about the draft agreement.

"By allowing or encouraging Chinese companies to conduct sanctionable activities with the Iranian regime, the Chinese government is undermining its own stated goal of promoting stability and peace.