BEIJING — The U.S. is threatening to cut businesses that help Iran evade sanctions off from the American financial system. It puts China's banks in an uncomfortable position: Beijing can reject the demands, but its biggest lenders still have strong incentives to preserve access to U.S. dollars.
U.S. Treasury Secretary Scott Bessent announced on Monday that any entity facilitating "money laundering or sanctions evasion on behalf of Iran risks being cut off from the U.S. financial system." It was part of the "Economic D-Day" against Iran announced by U.S. President Donald Trump.
When asked specifically about Chinese banks, Bessent said: "If they facilitate transactions and are part of the ecosystem that turns Iranian oil into money, into repression, they will be targeted."
China said Tuesday it would "take all necessary measures" to protect itself.
"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 on Tuesday in response to questions.
Before the war, China bought around 90% of Iran's exported oil — about 12% of China's total crude imports — making it Iran's largest trading partner, per analysts at the U.S.-China Economic and Security Review Commission in March.
Dubbed "Operation Economic Outcast," the expanded U.S. sanctions identified several China-based companies and individuals as having allegedly assisted the Iranian military.
The U.S. said it would give countries a timeline to shut down identified activities, but didn't share dates publicly. When CNBC asked about communication regarding the timeline, China's foreign ministry said it was closely monitoring the situation and reiterated that Beijing would protect its interests.
It's tough talk as a summit between Trump and Chinese President Xi Jinping is looming.
But analysts emphasize China will do what it can to stay in the U.S. dollar financing system. The U.S. has raised the bar for China and other countries that want to use the greenback — boosting their incentive to diversify. And the complexities of the U.S.-China economic rivalry make an "Economic D-Day" a tough order for the Trump administration.
How China's CIPS offers a hedge to the dollar
Peter Alexander, Shanghai-based managing director of advisory Z-Ben, told CNBC that China's Cross-Border Interbank Payment System (CIPS) showed it was trying to diversify from dollar-centered finance, without abandoning it altogether.
The People's Bank of China began building the CIPS in 2012 — the same year the U.S. Treasury sanctioned China's relatively small Bank of Kunlun over illicit Iran activities. Its transactions have picked up since the Russia-Ukraine war in 2022, and generally grown this year, according to official figures.
The system lists 210 direct participating institutions globally, mostly affiliates of state-owned Chinese banks.
Alexander also said that Argentina and Australia this month renewed bilateral currency swap agreements with China that enable 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 dollar's dominance
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, the secure bank messaging system that underpins international banking. That's down from over 4% in early 2025.
In trade finance, the U.S. dollar accounted for nearly 80% that month, while China's yuan ranked second at 8.4%, the Swift data showed.
"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," Tianchen Xu, senior economist at the Economist Intelligence Unit, told CNBC.
He said he expected China to use rare earth controls and other measures to retaliate against sanctions on major Chinese businesses.
But the U.S. also wants access to critical minerals that China has, incentivising it to keep the relationship stable.
Trump and Xi are still due to meet next month
Trump and China's Xi are expected to meet in the U.S. late next month, following Trump's visit to Beijing in May. Eurasia Group's China director Dan Wang said the U.S. doesn't want to derail the summit.
"The core of China-U.S. relation is more about [the] Taiwan situation ... [the] China-Iran tie is not nearly as close as outsiders have imagined," she said, noting Beijing has essentially halted state-backed infrastructure investment since 2018.
Removing a major Chinese bank from the SWIFT system would significantly increase devaluation pressure on the Chinese yuan, which is “not acceptable" to Beijing, she told CNBC's "The China Connection" on Tuesday.
The U.S. dollar index has strengthened since the Iran war began on Feb. 28, up by about 1.5%.
The Chinese yuan has gained nearly 2% against the U.S. dollar in that time, and more than 3% against the euro.
Earlier this year, China helped broker initial peace talks between Iran and the U.S. in Pakistan.
But analysts at the time cautioned that Beijing had neither the capability nor inclination to pressure either side into negotiating.
"Beijing hasn't even begun to play hard ball with America," Alexander said.
As for the U.S. response, "the question isn't what could be done," he told CNBC in an email, "the question is whether anything WILL be done."
Facts Only
* The U.S. Treasury Secretary announced that entities facilitating "money laundering or sanctions evasion on behalf of Iran" risk being cut off from the U.S. financial system.
* This action was part of the "Economic D-Day" against Iran announced by President Donald Trump.
* U.S. officials stated that if entities facilitate transactions and are part of the ecosystem turning Iranian oil into money or repression, they will be targeted.
* China stated it would "take all necessary measures" to protect itself in response to the sanctions.
* A Chinese foreign ministry spokesperson noted China's firm opposition to unilateral sanctions without international legal basis or UN Security Council authorization.
* China was Iran's largest trading partner, buying around 90% of Iran's exported oil before the war.
* The expanded U.S. sanctions, "Operation Economic Outcast," identified several China-based entities as allegedly assisting the Iranian military.
* The U.S. indicated it would provide a timeline for countries to shut down identified activities but did not share specific dates.
* China's Cross-Border Interbank Payment System (CIPS) was built starting in 2012.
* Bilateral currency swap agreements were renewed between China and Argentina/Australia allowing yuan exchange with central banks.
* The U.S. dollar accounted for over half of global payments in July, while the yuan ranked fifth at 3.1% according to Swift data.
Executive Summary
The U.S. Treasury Secretary announced that entities facilitating "money laundering or sanctions evasion on behalf of Iran" risk being cut off from the American financial system as part of an effort against Iran. This action was specifically mentioned in relation to Chinese banks, suggesting they will be targeted if they facilitate transactions linked to turning Iranian oil into money or repression. China responded by stating it would take necessary measures to protect itself and emphasized its firm opposition to unilateral sanctions lacking international legal basis.
The context involves the U.S. "Economic D-Day" against Iran, which included targeting China-based companies and individuals allegedly assisting the Iranian military under "Operation Economic Outcast." While the U.S. gave countries a timeline to shut down activities, China maintained it was monitoring the situation and would protect its interests.
Furthermore, China's financial system demonstrates an attempt to diversify from dollar-centered finance through systems like the Cross-Border Interbank Payment System (CIPS). Despite this diversification effort, the U.S. dollar maintains dominance in global payments, though China's yuan has seen some relative gains against the dollar. Analysts suggest that while China seeks to remain within the dollar system for trade benefits, it is pursuing geopolitical hedging instruments.
Full Take
The narrative pivots on the friction between unilateral geopolitical action—the U.S. sanctions—and established economic realities and systemic hedging strategies employed by major powers like China. The core tension is not simply about compliance, but about the resilience of alternative financial architectures against external coercion. The claim that China's CIPS represents a "geopolitical hedging instrument" suggests an awareness that financial sovereignty is pursued through structural diversification rather than outright rejection of global systems.
The pattern observed is the strategic decoupling of economic interdependence from strict adherence to Western-led financial norms. The U.S. action attempts to impose a system-level compliance framework (asset freezing) on actors embedded in global trade flows, which forces a choice between geopolitical alignment and systemic access. China’s response emphasizes sovereign autonomy over external legal mandates, reflecting a pattern of resisting externally imposed definitions of legitimacy.
The implication for human agency rests on whether these hedging mechanisms can truly insulate actors from sanctions or if the reliance on dollar-based infrastructure remains an inescapable vulnerability. The divergence between the stated goals—the desire to remain in the dollar system for trade efficiency and the implementation of parallel systems like CIPS—reveals a tension where economic utility competes with political necessity. The failure in executing "Economic D-Day" effectively, or China's ability to fully decouple its economic fate from Western financial pressure without significant systemic contraction, will determine the future structure of global finance.
Bridge Questions: If diversification is indeed a hedging instrument, what are the observable thresholds at which geopolitical pressures force a structural abandonment of those systems? How will the ongoing U.S.-China competition influence the perceived security value of non-dollar denominated financial channels among other emerging economies? What is the long-term stability risk when systemic divergence becomes the primary mode of international economic interaction?
Sentinel — Human
The text appears to be a synthesis of economic reporting, characterized by analytical depth derived from multiple named sources rather than purely synthetic generation.