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

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.

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.