The United States has threatened to cut off businesses and financial institutions that help Iran evade sanctions from the American financial system, putting Chinese banks in a difficult position as Beijing weighs its response.
US Treasury Secretary Scott Bessent said Monday that any entity facilitating “money laundering or sanctions evasion on behalf of Iran risks being cut off from the US financial system”.
The warning forms part of President Donald Trump’s expanded economic campaign against Iran, dubbed “Operation Economic Outcast”.
Bessent specifically warned that Chinese banks could be targeted if they facilitate transactions that help convert Iranian oil revenues into funds for the country’s military activities.
“If they facilitate transactions and are part of the ecosystem that turns Iranian oil into money, into repression, they will be targeted,” he said.
China responded on Tuesday by saying it would take “all necessary measures” to protect its interests.
A Chinese Foreign Ministry spokesperson said Beijing had repeatedly opposed what it described as unilateral sanctions lacking a basis in international law or authorisation from the United Nations Security Council.
The confrontation comes as China remains Iran’s biggest oil customer and trading partner.
Before the current conflict, China accounted for about 90 per cent of Iran’s oil exports, representing roughly 12 per cent of China’s total crude imports, according to analysts at the US-China Economic and Security Review Commission.
The latest US sanctions have identified several China-based companies and individuals accused of assisting Iran’s military.
Washington said affected countries would be given a timeline to shut down the identified activities, although it has not publicly disclosed specific deadlines.
China’s Foreign Ministry said it was closely monitoring developments and reiterated that Beijing would take measures to safeguard its legitimate interests.
The sanctions threat also comes ahead of an expected meeting between Trump and Chinese President Xi Jinping next month, adding another layer of tension to already strained US-China relations.
Analysts say China is unlikely to abandon the US dollar-based financial system because its banks and wider economy remain heavily dependent on access to dollar financing and global payment networks.
Peter Alexander, Shanghai-based managing director of advisory firm Z-Ben, said China’s Cross-Border Interbank Payment System, or CIPS, showed Beijing was seeking alternatives without completely moving away from the dollar.
China began developing CIPS in 2012, the same year the US Treasury sanctioned the Bank of Kunlun over alleged illicit transactions linked to Iran.
CIPS transactions have increased since Russia’s invasion of Ukraine in 2022 and continued to grow this year, according to official figures. The system currently lists 210 direct participating institutions globally, most of them affiliates of Chinese state-owned banks.
Alexander said China’s expansion of alternative financial arrangements was better understood as geopolitical hedging rather than an attempt to completely replace the dollar.
“The emerging financial system isn’t necessarily one in which countries abandon the USD,” he said. “It is a geopolitical hedging instrument.”
China has also expanded bilateral currency arrangements, with Argentina and Australia renewing currency swap agreements with Beijing this month.
Despite China’s efforts to reduce its exposure to the dollar, the US currency continues to dominate international finance.
Swift data showed the dollar accounted for more than half of global payments in July, while the yuan ranked fifth with a 3.1 per cent share.
In trade finance, the dollar accounted for nearly 80 per cent of transactions, compared with 8.4 per cent for the yuan.
Tianchen Xu, senior economist at The Economist Intelligence Unit, said China wanted to remain within the dollar system because of its importance to the country’s trade-driven economy.
“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 US sanctions,” Xu said.
She predicted that Beijing could respond to expanded US sanctions by using rare-earth controls and other economic measures against American interests.
However, Washington also depends on China for access to critical minerals, providing both sides with incentives to prevent their economic relationship from deteriorating further.
The sanctions dispute comes as Trump and Xi prepare for a possible meeting in the United States next month, following Trump’s visit to Beijing in May.
Dan Wang, China director at Eurasia Group, said Washington would be reluctant to take measures that could derail the planned summit.
She said the broader US-China relationship remained focused primarily on issues such as Taiwan, while China’s relationship with Iran was less strategically significant than some observers assume.
Wang noted that Beijing had largely halted state-backed infrastructure investment in Iran since 2018.
She also warned that removing a major Chinese bank from the Swift system would create significant pressure on the yuan, a scenario she said would be unacceptable to Beijing.
China previously helped broker initial peace talks between Iran and the US in Pakistan, although analysts cautioned that Beijing had limited capacity and willingness to force either side into negotiations.
Alexander said Beijing had yet to take a more confrontational approach towards Washington.
For the Trump administration, the key question is whether the threat of sanctions against Chinese financial institutions will translate into concrete action.
“The question isn’t what could be done,” Alexander said. “The question is whether anything WILL be done.”
Boluwatife Enome
Follow us on:
