Chinese banks face threat of U.S. sanctions over ties to Iran, but what can they do?

BEIJING — The United States is threatening to cut off companies from the U.S. financial system that help Iran evade sanctions. This puts Chinese banks in an uncomfortable position. The Chinese government could deny the request, but its biggest lenders still have strong incentives to maintain access to the U.S. dollar.

U.S. Treasury Secretary Scott Bessent announced Monday that “organizations that facilitate money laundering or sanctions evasion on behalf of Iran risk being cut off from the U.S. financial system.” This was part of U.S. President Donald Trump’s “Economic D-Day” for Iran.

Asked specifically about Chinese banks, Bessent said, “If they are part of the ecosystem that facilitates trade and turns Iranian oil into money and turns it into oppression, then they will be targeted.”

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

“China has repeatedly made clear that it firmly opposes illegal unilateral sanctions that have no basis in international law or UN Security Council approval,” a Chinese Foreign Ministry spokesperson said in response to questions on Tuesday.

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

The expanded US sanctions, dubbed “Operation Economic Purge,” identified multiple China-based companies and individuals suspected of supporting the Iranian military.

The United States said it would give countries a timetable to suspend identified activities, but did not release a date. When asked by CNBC about the communication regarding the timeline, China’s Ministry of Foreign Affairs said it was closely monitoring the situation and reiterated that Beijing would protect its interests.

This is a difficult topic, as the summit between President Trump and Chinese President Xi Jinping is fast approaching.

However, analysts stress that China will do everything it can to maintain the US dollar lending facility. The United States is raising standards for China and other countries that want to use the dollar, increasing incentives to diversify. And the complexity of the U.S.-China economic conflict makes “Economic D-Day” a tall order for the Trump administration.

Peter Alexander, managing director at Shanghai-based advisory firm Z Ben, told CNBC that China’s Cross-Border Interbank Payment System (CIPS) signals that China is diversifying away from dollar-centric finance, rather than abandoning it completely.

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 Iranian misconduct. According to official statistics, the company’s transactions have increased since the 2022 Russia-Ukraine war and have increased overall this year.

The system lists 210 direct participating institutions around the world, most of which are affiliates of Chinese state-owned banks.

Alexander also said Argentina and Australia renewed their bilateral currency swap agreement with China this month, allowing tens of billions of dollars worth of Chinese renminbi to be exchanged between the two countries’ central banks.

“An emerging financial system does not necessarily mean countries will abandon the US dollar,” Alexander said. “This is a geopolitical hedging tool.”

The US dollar still accounted for more than half of global payments in July, while the Chinese yuan ranked fifth at 3.1%, according to Swift, the secure banking messaging system that powers international banking. This has fallen from over 4% at the beginning of 2025.

The US dollar accounted for nearly 80% of trade finance in the month, with the Chinese yuan in second place at 8.4%, according to Swift data.

“China definitely wants to stay in the dollar regime, which benefits its trade engine, but that doesn’t mean it will go to great lengths to comply with expanded U.S. sanctions,” Tiancheng Xu, senior economist at the Economist Intelligence Unit, told CNBC.

He said he expected China to impose rare earth regulations or other measures in retaliation for sanctions against major Chinese companies.

But the United States also wants access to China’s critical mineral holdings and is urging China to maintain stability in the relationship.

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

“The core of China-US relations is rather the situation in Taiwan…The relationship between China and Iran is not as close as outsiders imagine,” he said, noting that the Chinese government has essentially halted state-sponsored infrastructure investment since 2018.

He told CNBC’s “The China Connection” on Tuesday that removing large Chinese banks from the SWIFT system would significantly increase devaluation pressure on the Chinese yuan, which is “unacceptable” to China.

Since the Iran war began on February 28, the US dollar index has risen, gaining about 1.5%.

During this period, the Chinese yuan appreciated nearly 2% against the US dollar and more than 3% against the euro.

Earlier this year, China helped broker 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 has not yet begun to take a tough stance against the United States,” Alexander said.

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