China Builds Hedge Against US Sanctions with CIPS

The US is threatening to cut businesses that help Iran evade sanctions off from the American financial system. This puts China's banks in an uncomfortable position, as they still have strong incentives to preserve access to US dollars.

China can reject the demands, but its biggest lenders want to stay connected to the US dollar system. The US has raised the bar for countries that use the greenback, making it more attractive for them to diversify their finances.

The Cross-Border Interbank Payment System (CIPS) is a Chinese initiative that shows the country's efforts to diversify from dollar-centered finance. CIPS lists 210 direct participating institutions globally and has seen an increase in transactions since the Russia-Ukraine war in 2022.