Beijing is walking a financial tightrope as Washington escalates sanctions pressure on Chinese institutions linked to Iranian oil transactions.
U.S. Treasury Secretary Scott Bessent announced that any entity facilitating “money laundering or sanctions evasion on behalf of Iran risks being cut off from the U.S. financial system.”
When pressed specifically on Chinese banks, Bessent warned: “If they facilitate transactions and are part of the ecosystem that turns Iranian oil into money, into repression, they will be targeted.”
The sweeping sanctions campaign, dubbed “Operation Economic Outcast,” identified several China-based companies and individuals as having allegedly assisted the Iranian military.
China responded defiantly, saying Tuesday it would “take all necessary measures” to protect itself from what it views as overreach by Washington.
“China has made clear on many occasions its firm opposition to illicit unilateral sanctions that have no basis in international law or the authorization of the UN Security Council,” a Chinese foreign ministry spokesperson said.
Before the war, China bought around 90% of Iran’s exported oil, representing about 12% of China’s total crude imports, according to analysts at the U.S.-China Economic and Security Review Commission.
Despite the tough rhetoric, analysts say China’s largest banks still have powerful incentives to maintain access to the U.S. dollar financing system that underpins global trade.
Peter Alexander, Shanghai-based managing director of advisory Z-Ben, pointed to China’s Cross-Border Interbank Payment System, known as CIPS, as evidence Beijing is diversifying without fully abandoning dollar-centered finance.
The People’s Bank of China began building CIPS in 2012, the same year the U.S. Treasury sanctioned the relatively small Bank of Kunlun over illicit Iran activities, and the system now lists 210 direct participating institutions globally.
Alexander also noted that Argentina and Australia this month renewed bilateral currency swap agreements with China, enabling the exchange of tens of billions of dollars’ worth of Chinese yuan between the countries’ central banks.
“The emerging financial system isn’t necessarily one in which countries abandon the USD,” Alexander said. “It is a geopolitical hedging instrument.”
The U.S. dollar still accounted for over half of global payments in July, while China’s yuan ranks fifth at 3.1%, according to Swift data, down from over 4% in early 2025.
Tianchen Xu, senior economist at the Economist Intelligence Unit, told CNBC that “China definitely wants to stay in the dollar system which benefits its trade engine, but that doesn’t mean it will do everything [to] comply with expanding U.S. sanctions.”
Xu said he expects China to deploy rare earth controls and other retaliatory measures if major Chinese businesses face sanctions, adding another layer of complexity to an already fraught relationship.
Eurasia Group’s China director Dan Wang warned that removing a major Chinese bank from the SWIFT system would significantly increase devaluation pressure on the yuan, which is “not acceptable” to Beijing.
Wang also noted that “the core of China-U.S. relation is more about [the] Taiwan situation,” suggesting the Iran issue may not be the defining flashpoint both sides are treating it as.
Trump and Chinese President Xi Jinping are expected to meet in the U.S. late next month, following Trump’s visit to Beijing in May, with analysts saying Washington has little appetite to derail that summit.
“Beijing hasn’t even begun to play hard ball with America,” Alexander said, adding that “the question isn’t what could be done — the question is whether anything WILL be done.”
