• U.S. Treasury Secretary Scott Bessent disclosed "very good private discussions" with China on Iran, signaling a quiet diplomatic push.
  • The talks, held in New York, aim to curb Iran's oil revenues and financial networks, a key unresolved issue before the September 24 Trump-Xi summit.
  • Markets watch for potential secondary sanctions on Chinese banks, which could disrupt global oil flows and trade finance.

Behind-the-Scenes Diplomacy

Treasury Secretary Scott Bessent said the U.S. has held "very good private discussions" with China regarding Iran, a sign that Washington is intensifying efforts to cut off Tehran's financial lifelines. The disclosure came during a House Financial Services Committee hearing on September 15, where Bessent revealed that he would pursue the matter directly with Chinese Vice Premier He Lifeng. The two met in New York on September 20, completing preparatory talks ahead of a scheduled summit between President Trump and President Xi Jinping on September 24.

While public reporting on the New York meeting emphasized agreements on trade and artificial intelligence—including a U.S. proposal for an AI safety and national-security notification mechanism—the Iran issue remained a principal unresolved agenda item, according to people familiar with the matter. No public Iran-specific agreement was announced, suggesting the matter is being elevated to the leaders' level.

Economic Stakes and Market Implications

The core of the U.S. objective is to restrict Iran's ability to raise, move, and spend foreign currency through oil exports, banks, intermediaries, and trade-finance channels. This falls under what the administration calls "Operation Economic Outcast," which recently included sanctions against Russia's VTB Bank (VTBR.ME) for alleged involvement in Iranian sanctions evasion.

China's role is pivotal: it received more than 80% of Iran's shipped oil in 2025—about 1.4 million barrels per day on average, according to Kpler data reported by Reuters. A barter-like arrangement converts oil proceeds into credits for Chinese goods, potentially including military equipment, without normal international bank transfers, Reuters reported. This structure reduces payment visibility and complicates enforcement.

Treasury has warned larger Chinese banks of possible secondary-sanctions exposure if Iranian funds move through their systems, while reportedly stopping short of designating those banks. A decision to do so would represent a major escalation in U.S.-China economic risk. "The key market question is whether the U.S. will increase pressure from targeted designations to penalties aimed at major Chinese financial institutions," said one analyst, who requested anonymity to discuss sensitive diplomacy.

The wider diplomacy is taking place amid a prolonged U.S.-Iran conflict, growing disruption to Gulf shipping, and efforts to restore reliable passage through the Strait of Hormuz. Oil rose above $100 per barrel in early September as the conflict intensified, Reuters reported, embedding a risk premium in crude prices. Higher crude feeds into fuel, freight, petrochemicals, airline costs, and eventually consumer prices, with the burden falling especially heavily on oil-importing countries and lower-income households.

China's Balancing Act

Beijing faces competing incentives. It benefits from discounted crude and seeks stable energy access as the world's largest crude importer. It is also an important diplomatic partner for Tehran and has urged Iran and the U.S. to exercise restraint and return to substantive consultations under their interim peace arrangement. At the same time, China must weigh its ties with Iran against the risks that U.S. secondary sanctions pose to Chinese banks, exporters, refiners, and access to the dollar-based financial system.

Chinese refiners and exporters gain from cheaper Iranian barrels but could face sanctions, reputational damage, financing constraints, and loss of access to Western counterparties if enforcement broadens. Shipping crews and insurers already face increased safety risks, higher premiums, rerouting costs, and delivery delays as traffic through the Strait of Hormuz has declined amid intensified attacks.

The Bessent-He discussions are therefore part sanctions diplomacy, part crisis-management channel, and part broader U.S.-China bargaining. The agenda also includes AI, trade, tariffs, rare earths, and agricultural purchases. Negotiators have discussed implementing a mechanism to identify potential tariff reductions on non-strategic goods, called the "Board of Trade."

Next Checkpoint: Trump-Xi Summit

The September 24 Trump-Xi summit is the next decisive checkpoint. The most plausible short-term outcomes include managed de-escalation, where China offers limited cooperation—such as stronger scrutiny of Iran-linked transactions or reduced exposure by certain refiners—while the U.S. holds back from sanctioning major Chinese banks. Alternatively, no public deal may emerge, with continued private bargaining, as the New York meeting produced public progress on AI and trade but no disclosed Iran arrangement.

If Washington determines Beijing has not changed behavior, it could target Chinese institutions facilitating Iranian financial flows. Former national security adviser H.R. McMaster has publicly predicted that this could become likely after the summit if China's conduct does not change, though this is analysis rather than announced policy.

A durable U.S.-China understanding could reduce the risk of financial spillovers and make sanctions enforcement more targeted. Conversely, a failure could accelerate fragmentation of global trade finance: more non-dollar settlement, more opaque commodity-trading structures, and a sharper division between sanctions-compliant and sanctions-resistant commercial networks. For markets, the combination of uncertain Hormuz flows, reduced inventories, and potential sanctions escalation means energy prices may retain a geopolitical premium even if there is no immediate supply shock.

Correction: An earlier version of this article misstated the date of the Bessent-He meeting. It took place on September 20, not September 15.