The Chinese yuan has shown remarkable stability, gaining nearly 2% against the US dollar and over 3% against the euro, even as the US threatens to cut off businesses assisting Iran in evading sanctions. This resilience comes amidst a complex geopolitical landscape where China, a major buyer of Iranian oil, aims to maintain its access to the US dollar financing system while also diversifying its financial instruments. Analysts note that China will likely avoid full compliance with expanding US sanctions to protect its economic interests, potentially retaliating with measures like controlling rare earth exports if major Chinese businesses are targeted.
Despite declarations of an "economic onslaught" on Iran, the US has so far refrained from directly sanctioning major Chinese banks facilitating Iranian oil purchases, largely due to concerns about Chinese retaliation and maintaining stable critical mineral access. China has consistently opposed unilateral sanctions and has stated it will take all necessary measures to safeguard its legitimate rights and interests, including banning the recognition of US sanctions on domestic companies involved in the Iranian oil trade.
China's Cross-Border Interbank Payment System (CIPS) is seen as an effort to diversify from dollar-centered finance, with transactions increasing since the Russia-Ukraine war. Although the US dollar still dominates global payments and trade finance, the yuan has emerged as a significant alternative, ranking fifth in global payments at 3.1% and second in trade finance at 8.4%. China's strategic currency swap agreements, such as those renewed with Argentina and Australia, further illustrate its efforts to hedge geopolitically without completely abandoning the dollar system.
Experts suggest that removing a major Chinese bank from the SWIFT system would significantly devalue the yuan, which Beijing deems "unacceptable." The US's reluctance to impose secondary sanctions on Chinese banks stems from the understanding that such a move could disrupt global economic stability and trigger a strong response from China, including potential restrictions on critical minerals that the US also needs.
