China needs U.S. dollars but is building a hedge against Washington's sanctions

• U.S. Treasury Secretary Scott Bessent warned that entities facilitating Iranian sanctions evasion risk being cut off from the U.S. financial system as part of 'Economic D-Day' against Iran
• The U.S. dollar still dominates global payments at over 50% and nearly 80% of trade finance, while China's yuan accounts for only 8.4% of trade finance as of July
• China's Cross-Border Interbank Payment System (CIPS) transactions have increased since 2022, with 157 financial institutions globally participating, serving as a geopolitical hedging tool rather than a full dollar replacement

Summary: China Hedges Against U.S. Dollar Sanctions While Maintaining Financial Ties

Key Development:

U.S. Treasury Secretary Scott Bessent threatened to sanction Chinese banks facilitating Iranian oil transactions as part of "Economic D-Day" sanctions against Iran. China has vowed to "take all necessary measures" to protect itself while maintaining its position in the dollar-based financial system.

Critical Figures:

• China purchases approximately 90% of Iran's exported oil, representing 12% of China's total crude imports
• The U.S. dollar accounts for over 50% of global payments and nearly 80% of trade finance (July data)
• China's yuan represents only 8.4% of trade finance, down from over 4% in early 2025
• The Chinese yuan has gained nearly 2% against the U.S. dollar since the Iran war began February 28

China's Diversification Strategy:

China has developed the Cross-Border Interbank Payment System (CIPS) since 2012 as a hedge against dollar dependence. CIPS transactions have increased significantly since the 2022 Russia-Ukraine war, with 408 participating institutions globally. Recent currency swap agreements with Argentina and Australia enable tens of billions in yuan exchanges, representing "geopolitical hedging" rather than dollar abandonment.

Market Implications:

Analysts emphasize China has strong incentives to remain in the dollar system to support its trade engine but won't fully comply with expanding U.S. sanctions. Expected Chinese retaliation includes rare earth controls. However, mutual economic dependencies—including U.S. demand for critical minerals—incentivize stability.

Outlook:

A Trump-Xi summit is scheduled for late next month. Analysts note removing major Chinese banks from SWIFT would create unacceptable yuan devaluation pressure for Beijing, suggesting limits to U.S. sanctions leverage.