U.S. Treasury Secretary Scott Bessent announced a new "economic D-Day" against Iran, threatening to cut off businesses facilitating sanctions evasion from the American financial system. When asked about Chinese banks, Bessent stated they would be targeted if they facilitate transactions turning Iranian oil into money for repression. This puts Chinese banks in a difficult position, as they have strong incentives to maintain access to U.S. dollars despite Beijing's potential rejection of these demands. China, which purchased about 90% of Iran's exported oil before the war, indicated it would "take all necessary measures" to protect its interests. Some analysts believe China will try to stay within the U.S. dollar financing system, even as it looks to diversify. Beijing has previously banned recognition or enforcement of U.S. sanctions targeting domestic companies involved in the Iranian oil trade.
China's Cross-Border Interbank Payment System (CIPS), established in 2012, is seen as an attempt to diversify from dollar-centered finance without abandoning it completely. CIPS transactions have increased since 2022 and show general growth this year, with 210 direct participating institutions globally, mostly affiliates of state-owned Chinese banks. Additionally, Argentina and Australia recently renewed bilateral currency swap agreements with China worth tens of billions of dollars, enabling yuan exchange between central banks. While the U.S. dollar accounted for over 50% of global payments in July, and nearly 80% in trade finance, the yuan ranked fifth at 3.1% and second at 8.4% in these respective categories, according to Swift data. The yuan has gained almost 2% against the U.S. dollar and more than 3% against the euro recently.
Despite the strong rhetoric, the U.S. has so far refrained from directly sanctioning major Chinese banks facilitating Iran's oil trade. While the Treasury warned two major Chinese banks previously, no action was taken. In April, the U.S. sanctioned Hengli petrochemical refinery and shipping companies for buying Iranian oil, an accusation the company denied. Analysts like Daniel Fried of the Atlantic Council and Ali Wyne of the International Crisis Group suggest the recent U.S. announcement was less forceful than anticipated, noting that Washington has largely overlooked China's involvement with Iran. The U.S. is reportedly wary of Chinese retaliation, such as restrictions on critical mineral exports, if major Chinese banks are sanctioned. China's Foreign Ministry spokesman Lin Jian asserted that China-Iran trade is within international law and opposes unilateral sanctions, stating China will protect its rights and interests cnbc.com, arabnews.com, businesstimes.com.sg.
Economist Tianchen Xu of The Economist Intelligence Unit believes China wants to stay in the dollar system for its trade engine but will not fully comply with expanding U.S. sanctions. He expects China to use measures like rare earth controls to retaliate against sanctions on major Chinese businesses cnbc.com. Removing a major Chinese bank from the SWIFT system would significantly devalue the yuan, which is unacceptable to Beijing. The upcoming meeting between President Trump and President Xi Jinping in September is expected to include discussions on trade with Iran, but the U.S. may want to avoid jeopardizing existing agreements, such as one preserving the flow of Chinese rare earths and capping U.S. tariffs arabnews.com. Some observers suggest the U.S. might be overstretched by domestic and international issues, making strong action against China less likely businesstimes.com.sg.
