America's sanctions on Iran are a test of power with China, not Tehran

BEFORE the world's mightiest sanctions regime collapses a regime, it must survive a war with the second largest one. That is the dilemma facing the United States as Treasury Secretary Scott Bessent prepares to unveil, on August 24th, what he calls the toughest sanctions ever imposed on Iran.

The official aim is economic strangulation of Tehran. The real test is whether Washington can force China to stop buying Iranian oil without triggering a wider clash with Beijing. Sanctions are supposed to be coercive diplomacy. When the main counterparty refuses to be coerced, they become something else: a battleground for financial hegemony.

To understand why, it helps to know what the United States is actually working with. Iran's economy is already in deep trouble. Inflation has reached nearly 80%, the currency has lost around a third of its value against the dollar, and the country is exporting little or no oil. Over 6,000 sanctions across financial, energy, aviation and other sectors have been applied since the Carter administration. A US naval blockade has closed Iran's ports. The six-month conflict that began in February has done more damage to the Iranian economy than any sanctions regime in history.

The reason for the latest escalation is not that the existing package has failed to hurt Iran. It is that it has failed to end the war. Iran, battered as it is, has not surrendered. Its parliament speaker, Mohammad Bagher Ghalibaf, has declared the Strait of Hormuz will remain closed until the United States lifts the blockade, releases frozen assets and ends military operations. Bessent has characterised his approach as a "one-two punch" of blockade and economic pressure, insisting "it is going to work in Iran and we are going to collapse this regime." Such language suggests the Treasury believes more pressure is still possible. Whether that belief is justified is the question.

The answer depends on one variable above all: China. By 2025, China was importing approximately 1.4 million barrels per day of Iranian crude, accounting for 80-90% of Tehran's oil exports and roughly 13% of China's own total crude imports. The trade runs through small independent refineries in Shandong province, known as "teapots", which buy discounted Iranian oil and settle payments in yuan through China's cross-border payment system, deliberately bypassing the dollar. Transactions are disguised with false invoicing — Iranian crude is listed on Chinese customs records as originating from Malaysia, Oman or the United Arab Emirates.

Washington has been at war with this system for months. The Treasury has already sanctioned six batches of Chinese entities between March 2025 and May 2026, including refineries, terminals and shipping operators. The effect has been what experts describe as "whack-a-mole": one refinery is designated, so Iran simply ships its oil to another. Iranian crude exports to China fell from around 1.75 million barrels per day in June to roughly 967,000 in July, but most barrels have merely found new recipients. The payment chain, operating outside dollar clearing, has proven especially resilient.

To be sure, the Treasury still has heavier weapons in reserve. The next rung on the escalation ladder would target major Chinese banks that handle Iran-linked funds. Two mainland banks have already received warning letters. Cutting off their access to dollar correspondent accounts would be the financial equivalent of a knockout blow — and also the kind of act that invites retaliation.

This is where the American position becomes precarious. China has already signalled its unwillingness to comply. In May, Beijing's Ministry of Commerce issued a formal blocking order invoking a 2021 statute that prohibits Chinese firms from obeying foreign sanctions it deems illegitimate. The same statute allows Chinese companies to seek damages from foreign banks and insurers that sever ties over compliance. It is a blunt instrument, but it is not an empty threat. The message is clear: Chinese state banks are caught between Beijing's directive and the dollar system, and Washington's leverage over them is not as complete as it once was.

The trouble is that the United States needs China to cooperate on precisely the issue where China has the most to lose. Chinese refineries running on cheap Iranian oil enjoy cost advantages that evaporate if the pipeline is cut. But Beijing benefits from keeping that pipeline open. A 25-year cooperation agreement signed in 2021 committed China to $400 billion of investment in Iranian infrastructure in exchange for below-market oil. The arrangement creates a mutual dependency: Iran relies on China as its only major customer, and China relies on Iran for discounted crude that would otherwise cost more on the global market.

Bessent appears to have calculated that China's broader energy interests should make it want to co-operate. He has pointed out that Chinese firms draw 50% of their energy from the Gulf and that keeping the Strait of Hormuz open is in Beijing's interest. The argument has logic. A protracted disruption to Gulf energy flows would damage Chinese industry far more than the loss of discounted Iranian crude. Yet incentives do not always produce compliance, especially when the sanctioning power has already become a primary source of strategic anxiety for the target.

There are also the retaliatory levers China holds. Beijing's response to past US sanctions on Chinese refiners has included threats to slow purchases of American soybeans — China is committed to buying 25 million metric tonnes annually through 2028 but is only a quarter of the way to its 2026 target. More ominous for Washington, China's restrictions on critical mineral exports are set to take effect two months from now. The administration has apparently chosen to hold back on major Chinese bank designations until after President Xi Jinping's planned visit to the White House next month. That timing suggests the Treasury knows where its own vulnerability lies.

The second-order consequence is that every escalation against Iran drags the United States deeper into a broader confrontation with China. In April, Mr Trump threatened a 50% tariff on Chinese imports after reports surfaced of Beijing preparing military shipments for Iran. China called the allegations "completely fabricated" and warned it would retaliate if tariffs followed. Whether those particular allegations held up is beside the point. What matters is that the Iran sanctions programme has become the primary vehicle through which Washington tests its ability to impose costs on Beijing using financial statecraft.

The danger is not that the sanctions will fail to hurt Iran. They already have. The danger is that the next level of escalation — targeting Chinese financial institutions or invoking blanket third-country sanctions — will fail to produce Chinese compliance while opening a new front in the economic war. Iran is not the prize in such a conflict. It is the casualty.

A wiser approach would acknowledge what the evidence has already shown. The whack-a-mole strategy against teapot refineries has reduced volumes but not broken the system. The system can only be broken by going after Chinese banks. That is possible, but it is also an act of economic escalation that goes far beyond Iran. If the United States wants regime change in Tehran, it needs to be honest that the price is a direct financial confrontation with Beijing — one that China is preparing for and is prepared to fight.

Mr Bessent's Monday press conference will tell us which gamble he has chosen.