Oil not into banks, goods into China: Iran's "oil exchange" network pushes Beijing to the heart of the sanctions war

A “oil exchange” mechanism between Iran and China that bypasses the traditional banking system is emerging. Reuters on September 10 that Iran has in recent years sold oil in exchange for the credit quota that can be used to purchase Chinese goods, allowing drugs, vehicles, communications equipment and even alleged contracts related to air defense equipment to continue to operate under US sanctions pressure. Insiders estimate that in the past year alone, about $2 billion to $2.5 billion may have been transferred through special purposes carriers. The real meaning of this mechanism is not an ordinary sanctions avoidance, but Beijing and Tehran are putting energy, trade and financial settlements together as a part of a way to circumvent the US system.

After Chinese buyers purchase Iranian crude oil, the funds do not directly enter the Iranian bank account, but are internally accounted by relevant entities and special purpose carriers in China to pay for Chinese exporters or Iranian infrastructure projects in China.

Oil is turned back into “currency”

The core logic of U.S. sanctions is that by controlling dollar settlements, bank settlements and the international financial system, it is difficult for Iran to convert oil revenues into cash that can be used freely.Tehran’s response is to reinstate oil itself as a payment instrument: not to exchange crude oil for dollars and buy goods from dollar accounts, but directly to establish a closed circle of “oil-credit-commodities”.

When oil revenues no longer need to pass through the traditional banking system, the power of U.S. financial sanctions will be weakened, but at the same time, enterprises, ports and financial nodes involved in the network will be pushed to the forefront of the risk of sanctions.

A Chinese-based entity called "ChuXin" is alleged to have played a role in funding allocation in the related structures, with part of the oil revenue being spent on Iranian infrastructure and part on paying for Chinese exports.The mechanism has been operating since at least 2021, initially including procurement of drugs and new coronavaccinations, and then increasing its importance with U.S. pressure.

Why China is willing to become Iran’s economic buffer zone

For Beijing, Iran is first and foremost an energy transaction. China has long been one of Iran's most important buyers of crude oil, and crude oil is often subject to significant price discounts. By 2025, China is estimated to buy more than 80% of Iran's crude oil exports, averaging about 1.4 million barrels a day. For independent refineries in Shandong and other places, this discount supply is attractive for the long term.

In addition to energy, China and Iran have a deeper strategic value.Beijing opposes U.S. unilateral sanctions and hopes to demonstrate that Washington cannot fully decide with whom other countries trade through dollars and secondary sanctions. Continuing to buy Iranian oil is in itself a way for China to challenge the scope of U.S. sanctions; creating an alternative settlement mechanism pushes this challenge from diplomatic statements to infrastructure levels.

China does not want to pay the unlimited cost. Large state-owned banks and the most important multinational enterprises are still heavily dependent on the global financial system, so Beijing needs to avoid their direct exposure to the toughest U.S. sanctions. This forms a typical grey structure: transactions continue, but risk isolation through smaller entities, local refineries, Hong Kong companies, specialized carriers and non-traditional settlement layers.

“Deniability” is precisely the core asset of this system

According to researchers in Iran, Beijing needs “plausible deniability,” which means that there is room for denial.This judgment points to the most critical institutional design of Sino-Iran economic cooperation.China can adhere to normal trade legality, can claim not to deal directly with Iran’s sanctioned subjects, banks can reduce the trace of direct settlement, while Iran still gets the goods and infrastructure it needs.

These types of networks usually have several common features:

• Transaction Subjects Fragmentation: Separating large state-owned enterprises, banks and high-risk from smaller entities to take on interfaces;
• Close-up for funding purposes: oil revenues are not freely transferred back to Iran, but are used for specified procurement within China;
• Blurred trade sources: Reduced direct identification through intermediaries, transfers, re-marking sources and so on;
• Decentralized political responsibility: Keeping enough distance between governments, enterprises and financial institutions so that any single node can deny the entire arrangement.

This does not mean that all Chinese manufacturers who sell goods to Iran are aware of their end-use. Reuters makes it clear that some manufacturers may only receive domestic payments and there is no evidence that they are directly violating the sanctions. The real concern is the system-level organizational ability: If oil revenues can be converted to billions of dollars in commodities without entering traditional international settlements, sanctions avoidance is no longer a scattering of underground transactions, but a large-scale trade infrastructure.

War is pushing this grey system forward.

After the escalation of the U.S. conflict, transportation in the Strait of Hormuz was severely injured, and Brent rebounded to $100 per barrel. China's independent refineries began to shift to western Africa, Canada and South America, indicating that Iran's supply blockage has directly changed China's procurement structure. This also exposed Beijing's strategic contradiction: on the one hand, China benefited from discounting Iran's oil and countering U.S. sanctions; on the other hand, once the Middle East war really cut off shipping, China was one of the largest economies most vulnerable to energy shocks.

Beijing hopes Iran can resist U.S. pressure, but does not want Iran’s regional war out of control; hopes for cheap crude oil, but does not want the Strait of Hormuz to be closed; hopes to weaken the dollar sanctions tools, but not let China’s most important bank be kicked out of the U.S. dollar system. The essence of China’s policy toward Iraq is to challenge the U.S. order and rely on the U.S. dominated financial system.

Focus on China believes that this network of “oil for credit, credit for commodity” is worth long-term tracking as it reveals the possible direction of a future war of sanctions by the great powers. The United States controls banks and the dollar, while China and the sanctioned countries seek alternatives to trade, energy and domestic settlement. The battlefield of sanctions and counter sanctions has extended from bank accounts to tankers, ports, warehouses, trade companies and supply chains.

The real question is not whether China is buying Iranian oil, but what kind of economic order Beijing is helping to establish: it uses the existing global financial system to gain wealth and creates parallel channels to weaken rules under U.S. pressure.