China Bolsters Dollar Hedging Amid U.S. Sanctions on Iran

The United States is tightening its sanctions net on entities that help Iran evade restrictions, putting Chinese banks in an uncomfortable spot as they try to preserve access to the greenback.

Washington’s New Sanctions Edge and China’s Dollar Dependence

■U.S. Treasury Secretary Scott Bessent warned that any entity facilitating money‑laundering or sanctions evasion for Iran risks being cut off from the American financial system.

■Before the sanctions escalation, China purchased roughly %90 of Iran’s exported crude, representing about %12 of its total oil imports and making it Tehran’s largest trading partner.

■The expanded “Operation Economic Outcast” sanctions have named several China‑based firms and individuals, though the Trump administration has not published a public timeline for winding down the activities.

CIPS and Bilateral Swap Arrangements: Testing Alternatives to the Dollar

■Launched in 2012 by the People’s Bank of China, the Cross‑Border Interbank Payment System (CIPS) now counts 210 direct participants, most of them affiliates of state‑owned Chinese banks.

■Since the Russia‑Ukraine war began in 2022, CIPS transaction volume has risen by about %30, while Swift data show the dollar’s share of global payments falling below %50 and the yuan slipping to %3.1 in July 2025.

■This month Argentina and Australia renewed billion‑dollar‑scale yuan swap agreements with China, expanding Beijing’s bilateral liquidity network.

Rare Earths and Critical Minerals: Beijing’s Counter‑Sanction Lever

■China retains leverage through its control of rare earth supplies and other strategic commodities, which it can use to retaliate against U.S. sanctions on major Chinese firms.

■Tianchen Xu, senior economist at The Economist Intelligence Unit, expects Beijing to deploy export controls or tariffs on critical minerals such as lithium and rare earths as a sanctions‑response tool.

■At the same time, the United States seeks continued access to China’s critical mineral reserves, giving both sides an incentive to keep the broader relationship from collapsing entirely.

Kemal Tekin – Head of Emerging Markets Desk: China does not need to abandon the dollar system outright; by expanding CIPS and renewing yuan swap lines it is building a hedge that reduces reliance on the greenback while preserving the value of its reserves. Washington’s hard‑line sanctions push Beijing toward alternative payment channels, yet the risk of a yuan devaluation remains a strategic concern for policymakers.