Iran has been using a secret barter-style trading mechanism to sell oil to China and use the proceeds to pay for Chinese goods and services, helping Tehran bypass US sanctions, Reuters reported.The arrangement has enabled Iran to import billions of dollars’ worth of medicines, vehicles and communications equipment from China in recent years. It was also reportedly used for a deal worth several million dollars to supply air defence equipment to Iran over the past year.Two senior Iranian sources and three other people familiar with the arrangement told Reuters that the proceeds from Iranian oil sales are not transferred directly to Chinese exporters through the international banking system. Instead, the money is held as credit to finance Iranian purchases of Chinese goods.The mechanism has provided Iran with an important financial channel amid US economic and military pressure, while allowing China to continue receiving discounted Iranian crude. Chinese banks and companies exporting goods to Iran can also reduce their exposure to international sanctions through the arrangement.Reuters said the United States has sanctioned some smaller Chinese companies involved in buying or transporting Iranian oil but has so far avoided tougher measures that could have a wider impact on the global economy.Washington has recently increased pressure on Iran as part of efforts to end the ongoing conflict and reopen the Strait of Hormuz. In August, US Treasury Secretary Scott Bessent warned countries to cut commercial ties with Iran or risk being excluded from the dollar-based international financial system.However, Reuters could not establish how the US naval blockade has affected the arrangement. The agency reported last week that no Iranian crude oil tanker had successfully crossed the Strait of Hormuz to reach China since the blockade was reinstated on July 14.How the system worksAccording to Reuters, an obscure financial entity in China, known as “Chushin”, is a key part of the arrangement.A Western source and two people familiar with the matter said a buyer working for state-owned Chinese oil trader Zhuhai Zhenrong had been depositing several hundred million dollars a month into Chushin until this year.The money was then used to settle import contracts involving a Hong Kong-registered company linked to Iran’s National Iranian Oil Company. Chushin subsequently transferred funds to Chinese exporters and companies involved in infrastructure projects in Iran, possibly through other Chinese financial institutions.Sources estimated that around 70 percent of the oil-sale proceeds handled through Chushin was spent on infrastructure projects. The remainder was held in an account belonging to a special purpose vehicle, or SPV, and used to pay companies supplying goods to Iran.Two sources close to Iranian decision-making confirmed the existence of the SPV. They said it was managed by two entities, one working on behalf of China's Ministry of Commerce and the other linked to Iran's central bank.Once Iran's central bank approves an importer to use funds from the SPV, an Iran-linked entity informs the Chinese side, after which payments are made to the relevant Chinese suppliers.Reuters, however, found no Chinese corporate registration records for a financial institution called Chushin. Nor did it find reliable official records for the entities reportedly acting on behalf of China's commerce ministry and Iran's central bank. One source even suggested that Chushin could simply be a name appearing on a spreadsheet.A mechanism dating back to 2021Sources said the system has been operating since at least 2021. It was initially used to supply medicines and Covid-19 vaccines to Iran but became more important as the United States increased pressure on companies doing business with Tehran.According to the sources, around $2 billion to $2.5 billion has passed through the SPV over the past year.China's dependence on Iranian oil has added importance to the arrangement. Data from commodities analytics firm Kpler showed that China bought more than 80 percent of Iran's seaborne oil exports in 2025, averaging around 1.4 million barrels a day.Iran and China signed a 25-year strategic partnership agreement in 2021 covering areas including energy and infrastructure, although few details of the agreement have been made public.Andrea Ghiselli, a lecturer in international politics at the University of Exeter, said such arrangements allow China to withstand US pressure while signalling that Beijing cannot easily be compelled through threats of secondary sanctions.At the same time, he said, China's leadership wants to shield its banks and companies from the risk of being cut off from the international financial system, leaving enough room to deny responsibility when necessary.China told Reuters it was not aware of the situation described in the report. Its Foreign Ministry said Beijing opposes unilateral sanctions that lack a basis in international law or authorisation from the UN Security Council. Iran's UN mission and central bank did not respond to Reuters' questions. Zhuhai Zhenrong and the National Iranian Oil Company also declined to comment on their alleged roles. The US administration did not directly comment on the specific trading mechanism.