A recent Wall Street Journal report has highlighted how China serves as a crucial economic lifeline for Iran, primarily by purchasing the vast majority of its oil exports. This relationship allows Tehran to generate tens of billions of dollars in annual revenue, effectively undermining extensive U.S. sanctions.
The mechanism for this trade is a sophisticated ecosystem designed to evade international scrutiny. At its core are China's small, independent 'teapot' refiners, which have a large appetite for the discounted Iranian crude. Payments are routed through a dense network of front companies, often based in Hong Kong, and settled in Chinese yuan through smaller, less internationally exposed Chinese banks. This shadow financial system minimizes the risk of U.S. secondary sanctions that could target major financial institutions.
This situation didn't emerge overnight but is the result of several interconnected factors. First, China's domestic energy policy has played a key role. Beijing steadily increased crude import quotas for non-state refiners, creating the capacity to absorb large volumes of sanctioned oil. Second, a resilient logistics network, including a 'shadow fleet' of tankers, ensures the physical delivery of the oil. These vessels often engage in 'dark' transits and ship-to-ship transfers in places like the waters off Malaysia to hide the origin of their cargo. Third, the development of yuan-based payment channels provided a way to bypass the U.S. dollar-denominated global financial system.
Finally, Washington's policy choices have inadvertently enabled this trade to continue. The U.S. has been hesitant to impose systemic sanctions on Chinese financial institutions due to the risk of triggering a sharp spike in global oil prices. This exact dilemma was visible during the March 2026 Iran war scare when Brent crude briefly soared to nearly $120 a barrel. The fear of such price shocks forces U.S. policymakers to favor targeted sanctions on individual entities rather than broader actions that could disrupt the market, thus allowing the core of the China-Iran oil trade to persist.
- Teapot refiners: Small, independent oil refineries in China, as opposed to the large state-owned ones.
- Shadow fleet: A fleet of tankers, often old and operating with obscured ownership and insurance, used to transport oil from sanctioned countries.
- OFAC (Office of Foreign Assets Control): A U.S. Treasury Department agency that administers and enforces economic and trade sanctions.