Iran’s Hormuz pain is China’s yuan gain

TOKYO — Say what you want about the Iranian regime, it’s a master troller in ways for which US President Donald Trump surely didn’t foresee.

Nowhere is that more apparent — or potentially impactful — than Iran’s reported plan to showcase the yuan by requiring all oil tankers transiting the Strait of Hormuz to settle transactions in the Chinese currency. It’s enough to ruin Trump’s week — and that’s saying a lot considering the many ways the US-Israeli attack on Iran has gone sideways.

Another example: Iran calling Trump’s bluff in supposed ceasefire talks. On Monday, Trump delighted markets by stating he’s postponing his 48-hour ultimatum on attacking Iran’s energy infrastructure amid “productive” negotiations to end the hostilities. Tehran’s response, essentially, was: “Uhhh, what talks?”

But the yuan wrinkle could put Trump World in quite a bind. Assuming Iran would even consider allowing US-bound tankers through the Strait, requiring payment in yuan would be a significant diplomatic concession. Among the reasons Trump was reelected was a pledge to take China down a peg, hence his tariff-fueled trade war.

Inadvertently, though, Trump is making the idea of a “petro-yuan” great again. 

Kashif Hasan Khan, economist at Cambodia’s Paragon International University, notes that reports that Tehran may condition tanker passage on yuan-denominated oil trade should be read less as a technical payment proposal than as a geopolitical signal. As he writes in an Asia Times op-ed, “It would represent a deliberate attempt to fuse military geography with monetary strategy.”

Khan argues that Iran has at least three incentives for demanding yuan. One, evading sanctions. Two, do China a solid to stay in Xi Jinping’s good graces. Three, challenging the petrodollar order.

Of course, the dollar isn’t about to be dethroned overnight, nor is the yuan ready to assume the full burdens of a global reserve currency. Ten years after Xi got serious about yuan internationalization, China’s currency accounts for just 2% of foreign-exchange reserves, compared with 57% for the dollar and roughly 20% for the euro.

For all China’s ambitions to replace the dollar, Team Xi has yet to scrap capital controls or let the People’s Bank of China make its own rate decisions. Even though US debt is zooming toward US$40 trillion, chaos in the Middle East has led many investors to choose holding dollars over gold.

The Economist puts it well this week when it argues that “conflict ravaging the Middle East may best be understood as two parallel wars. One is the campaign of American and Israeli air strikes against the Iranian regime; the other is Iran’s war on the global economy.”

If Trump fails to address both simultaneously and successfully, says Frederick Kempe, CEO of the Atlantic Council, “he risks turning what has thus far been a tactical military success into a strategic failure with longer-term consequences for international stability.”

The first war is one of missiles, drones and Israel’s targeting of Iranian leaders, now entering its fourth week. “That brings us to the second conflict unfolding in shipping lanes, in energy markets and among political leaders,” Kempe notes.

“In its war on the global economy, Iran maintains dangerous leverage. Tehran’s moves to halt shipping in the Strait of Hormuz, a narrow artery in the global energy economy’s circulatory system, has produced shocks to the global system,” he adds.

In the decade that Xi has been trying to increase the yuan’s global footprint, something was always missing — until now. Turns out, that thing was Trump.

The 14 months since Trump returned to the White House have become increasingly more unhinged — from kidnapping Venezuelan President Nicolas Maduro to killing Iran’s supreme leader, Ayatollah Ali Khamenei, and his inner circle. The resulting surge in oil prices, with Brent crude now around $100 per barrel, has upended the global financial system.

All this has Xi sensing an opportunity that seemed almost unthinkable in January 2025 when Trump 2.0 began. Xi couldn’t have imagined the extent to which the Trump administration is effectively shooting US credibility in both feet — and still pulling the trigger.

With the national debt exploding and Congress mired in gridlock, and Trump waging both trade and military wars simultaneously, it’s hard to think of a more obvious case study in economic brand destruction.

What Trump is doing is arguably worse than, say, Brexit. In that case, isolationist lawmakers were largely undermining the UK’s economic prospects. Trump, by sharp comparison, is dragging the entire global economy down alongside the US.

Count the ways the tariffs backfired. After all that lost international goodwill and domestic pain, China still posted a record $1.2 trillion trade surplus in 2025. Meanwhile, US manufacturing is shedding jobs, not adding them, while the White House is bailing out farmers who can’t sell their crops abroad.

A Group of Seven nation openly flirting with rogue‑state behavior is unprecedented. So is watching an economy so casually torch the “exorbitant privilege” that still allows the US to issue 10‑year debt at 4.1% yields.

Yet even with Washington’s missteps, dethroning the “King dollar,” as many economists call it, will require significant effort on Xi’s part. He would need to move decisively to loosen capital controls, make the yuan fully convertible, build transparent and trusted global payment systems, strengthen institutional credibility and grant the PBOC true independence.

Ironically, the glacial pace of reform since the Xi era began in 2013 is the dollar’s best hope — for now. During all that time, Xi’s party has known exactly which reforms are needed to elevate the yuan’s global standing. But progress has been slow, and China has yet to prioritize the supply‑side changes required to build deeper international trust in its financial system.

Nor is China’s underlying financial system state-of-the-art. A multiyear property crisis is fueling deflation. It’s also dampening household confidence. Prodding households to save less and deploy more of their $22 trillion in savings is key to ending deflation. Yet, with 70% of household assets in real estate, it’s also vital to stabilize housing prices.

The slower Team Xi moves to fix these and other cracks in the financial system underpinning Asia’s biggest economy, the more they will limit Xi’s ambitions to morph China into a tech and innovation leader.

Still, the ways in which Trump is effectively sabotaging US institutions present quite an opportunity for Xi’s Communist Party. This year might be remembered as something of an inflection point for the yuan-versus-dollar debate.

Iran “allowing a limited number of oil tankers to transit the Strait of Hormuz on the condition that their cargo be traded in Chinese yuan represents one of the most consequential and symbolically charged financial propositions in the post-Bretton Woods era,” argues economist Antonio Bhardwaj in an op-ed in Foreign Affairs Forum.

“This,” Bhardwaj adds, “is not merely a tactical maneuver by a sanctions-besieged state seeking leverage over its adversaries. It is the latest — and perhaps most operationally significant — manifestation of a structural realignment that has been gathering momentum for over a decade: the systematic erosion of the petrodollar system and the emergence of the petroyuan as a credible, institutionally embedded alternative framework for settling global energy transactions.”

Now, says Deputy PBOC Governor Zhu Hexin, the yuan is used to settle 30% of China’s $6.2 trillion in global trade in goods. Once all cross-border payments, including foreign investment and bond purchases, are factored in, the yuan’s share jumps to 53%. 

The yuan now surpasses dollar-based transactions in China. This helps explain why Team Xi is working behind the scenes to build a bigger and multi-layered yuan infrastructure in preparation for a dollar reckoning that Trump appears to welcome.

US Treasury Secretary Scott Bessent claims the dollar’s best days lie ahead. Yet, Bessent seems to spend all of his time cleaning, smoothing out and disappearing Trump’s increasingly unhinged rhetoric and actions. When Trump says he wants to fire Federal Reserve Chair Jerome Powell, it falls to Bessent to claim it won’t happen – and to feign surprise that anyone could dare ask.

When Trump talks of devaluing the dollar, it’s become Bessent’s job to counsel calm. The same goes for Trump’s itchy tariff finger as he aimed it at Europe, South Korea and any other place Trump World deems insufficiently obsequious.

Clearly, Bessent is in “denial,” warns Desmond Lachman, a former deputy International Monetary Fund director. “As Treasury secretary, Bessent is supporting a grossly irresponsible budget and foreign policy, which is putting the United States on a path to economic ruin.”

As Team Trump is shrinking American influence, China is positioning itself as a “harbor of stability” in an unusually chaotic year at this year’s China Development Forum.

In Beijing on Sunday, Premier Li Qiang told more than 70 chief executives on hand that “we take our trading partners’ concerns seriously and we are ready to work with all parties to promote the sound and balanced development of trade. We will also further widen market access for the services sector, and increase imports of medical and health care products, digital technologies and low carbon services to provide more business opportunities for foreign companies.”

Those executives include Apple’s Tim Cook, UBS’s Sergio Ermotti and HSBC’s Georges Elhedery. Li’s pitch was that it would be a “cornerstone of certainty” amid rising trade protectionism and upheaval in the rules-based international order, which must have raised eyebrows in Washington.

“China,” Li said, “will unswervingly promote high-level opening up to the outside, import more high-quality foreign goods and work with all parties to promote the optimized and balanced development of trade, jointly expanding the global economic and trade pie.”

Compared to previous China Development Forums, notes Han Lin, China director at The Asia Group, Beijing’s “messaging was the most confident.” He added that Li’s comments about “what China was doing right to encourage ​innovation, trade and other opportunities to collaborate,” stand in sharp contrast to US policies in 2026.

Not surprisingly, China sees this moment as one to double down on internationalizing the yuan – and with a timely assist from Iran and its blockade of the global oil trade.

Follow William Pesek on X at @WilliamPesek