The Risk in Targeting Chinese Banks Over Iran

Lawmakers from both parties are pressing the Treasury to target Chinese banks over their business with Iran. Supporters argue that cutting off financing would weaken Tehran’s ability to sustain its military activities. That argument deserves to be examined, but so does the mechanism. Sanctioning a major bank affects far more than the transactions officials intend to stop. Depending on the restrictions imposed, unrelated importers and exporters could find payments delayed or credit withdrawn. The politicians announce the punishment while businesses discover how widely the damage spreads.

Treasury has already laid the groundwork. In April it warned financial institutions about transactions involving Chinese independent refineries purchasing Iranian oil and explicitly raised the possibility of secondary sanctions. These measures pressure foreign institutions to comply with American restrictions by threatening their access to American finance. Washington is effectively telling a Chinese bank that its business with Iran can jeopardize its business with the United States. That is considerable leverage, but exercising it against a major financial institution carries a different order of risk from sanctioning an obscure trading company.

The administration has so far stopped short of that broader confrontation. Reuters reported that the August 24 sanctions package targeted 60 individuals, entities, and vessels but did not include major Chinese financial institutions. A consequential decision remains: whether to escalate against institutions whose connections extend well beyond Iran.

Dennis Wilder, a former National Security Council director for China, described action against large Chinese banks as the “nuclear economic weapon.” That description ought to make people pause. A major bank is part of the machinery through which companies obtain financing, settle invoices, manage currencies, and pay suppliers. Threatening that machinery introduces uncertainty into transactions that have nothing to do with Tehran. Even before restrictions take effect, banks may retreat from permissible business because the cost of accidentally violating a sanction appears greater than the profit from serving the customer.

China warned of retaliation if its companies were affected by expanded sanctions, while major Chinese financial institutions remained outside the latest measures. China has economic pressure points of its own, including critical minerals and access to its domestic market. Washington cannot assume that financial coercion will produce a response confined to banking. A dispute over Iranian oil could become another confrontation over industrial supplies, export restrictions, and the ability of American companies to conduct business.

The connection to sovereign debt is equally uncomfortable. Governments want dependable access to international capital while making international finance more political and less dependable. If restrictions disrupt supplies or raise transaction costs, businesses face higher expenses and governments face pressure to subsidize the damage. If confrontation then produces additional military commitments, borrowing rises again. None of this guarantees a debt crisis, but it adds costs and uncertainty to fiscal systems already burdened by competing promises.

Economic warfare has given foreign governments another reason to question the safety of keeping their national wealth in Western financial assets. When selected Russian banks were disconnected from SWIFT and Russia’s central-bank reserves were frozen in 2022, the message extended far beyond Moscow: access to your money can depend on your relationship with the governments controlling the system. That has strengthened the incentive to diversify reserves, accumulate gold, and reduce exposure to assets that could become inaccessible during a political confrontation.

China understands that vulnerability and has been building greater industrial self-reliance while seeking ways to reduce its dependence on dollar finance. Beijing is working toward becoming self-sufficient and independent of the West, for it knows the relationship is taken lightly. Washington wants other nations to trust its financial system with their savings while threatening to exclude them whenever their foreign policy conflicts with American demands. Every additional threat gives Beijing another argument for reducing the dependence that makes those threats effective.