Chinese banks face threat of US sanctions over ties to Iran: what can they do?

BEIJING – The United States is threatening to remove companies that help Iran evade sanctions from the American financial system. It puts Chinese banks in an awkward position: Beijing may reject the demands, but its largest lenders still have strong incentives to preserve access to U.S. dollars.

US Treasury Secretary Scott Bessent announced Monday that any entity that facilitates “money laundering or sanctions evasion on behalf of Iran risks being cut off from the US financial system.” It was part of the “economic D-Day” against Iran announced by US President Donald Trump.

Asked specifically about Chinese banks, Bessent said: “If they facilitate transactions and are part of the ecosystem that turns Iranian oil into money, in repression, they will be targeted.”

China said on Tuesday it would “take all necessary measures” to protect itself.

“China has made clear on many occasions its firm opposition to unlawful unilateral sanctions that have no basis in international law or UN Security Council authorization,” a Chinese Foreign Ministry spokesperson said in response to questions on Tuesday.

Before the war, China bought about 90% of Iran’s exported oil (about 12% of China’s total crude oil imports), making it Iran’s largest trading partner, according to analysts at the US-China Economic and Security Review Commission in March.

Dubbed “Operation Economic Pariah,” the expanded U.S. sanctions identified several China-based companies and individuals that had allegedly aided the Iranian military.

The United States said it would give countries a timeline for closing identified activities, but did not share the dates publicly. When asked by CNBC about the communication on the timeline, China’s Foreign Ministry said it was closely monitoring the situation and reiterated that Beijing would protect its interests.

It’s hard to talk now with a summit between Trump and Chinese President Xi Jinping looming.

But analysts emphasize that China will do everything possible to remain in the US dollar financing system. The United States has raised the bar for China and other countries that want to use the dollar, increasing their incentive to diversify. And the complexities of the economic rivalry between the United States and China make an economic D-Day a difficult task for the Trump administration.

Peter Alexander, managing director of Shanghai-based consultancy Z-Ben, told CNBC that the China Cross-Border Interbank Payment System, or CIPS, showed it was trying to diversify away from dollar-centric finance, without abandoning it entirely.

The People’s Bank of China began building CIPS in 2012, the same year the U.S. Treasury sanctioned China’s relatively small Kunlun Bank for illicit activities in Iran. Its transactions have recovered since the Russia-Ukraine war in 2022 and have generally grown this year, according to official figures.

The system lists 210 direct participating institutions around the world, mostly affiliates of Chinese state banks.

Alexander also said Argentina and Australia this month renewed bilateral currency swap agreements with China that allow tens of billions of dollars in yuan to be exchanged between the countries’ central banks.

“The emerging financial system is not necessarily one in which countries abandon the dollar,” Alexander said. “It is an instrument of geopolitical coverage.”

The US dollar still accounted for more than half of global payments in July, while the Chinese yuan is fifth at 3.1%, according to Swift, the secure banking messaging system that underpins international banking. That’s down from more than 4% at the beginning of 2025.

In trade finance, the US dollar accounted for nearly 80% that month, while the Chinese yuan came in second at 8.4%, 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 it can to [to] comply with growing US 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 companies.

But the United States also wants access to critical minerals that China has, which incentivizes it to keep the relationship stable.

Trump and China’s Xi are expected to meet in the United States late next month, following Trump’s visit to Beijing in May. Dan Wang, China director of the Eurasia Group, said the United States does not want to derail the summit.

“The core of the China-U.S. relationship has more to do [the] The situation in Taiwan… [the] “The link between China and Iran is not as close as foreigners imagined,” he said, noting that Beijing has essentially stopped investment in state-backed infrastructure 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, he told CNBC’s “The China Connection” on Tuesday.

The US Dollar Index has strengthened since the war with Iran began on February 28, rising around 1.5%.

The Chinese yuan has gained almost 2% against the US dollar in that time and more than 3% against the euro.

Earlier this year, China helped mediate initial peace talks between Iran and the United States in Pakistan.

But analysts at the time warned that Beijing had neither the ability nor the inclination to pressure either side to negotiate.

“Beijing hasn’t even started playing hardball with the United States,” Alexander said.

As for the U.S. response, “the question is not what could be done,” he told CNBC in an email, “the question is whether anything will be done.”