With Secretary of State Antony Blinken due to visit China this week, it remains to be seen whether this financial threat will dent the China-Russia trade enabling Moscow to rebuild its military after losses in Ukraine, the report said.

Blinken on Friday criticized Chinese support for Russia's defence industry, saying Beijing was the key contributor to Moscow's war in Ukraine through its provision of critical components for weaponry.

In recent weeks, U.S. officials have intensified pressure on China, warning that Washington was ready to take action against Chinese financial institutions facilitating trade in goods with dual civilian and military applications.

U.S. officials said targeting banks with sanctions was an escalatory option in case diplomatic overtures fail to persuade Beijing to curb exports, the report said.

Cutting banks off from access to the dollar - used in much of global trade - is often reserved as a last resort, as such sanctions often force banks into failure.

It would also represent a particular risk for China, amid a sputtering economic recovery and growing debt.

'GROUNDLESS ACCUSATIONS'

A spokesperson for China's foreign ministry on Tuesday said China was "firmly opposed" to the U.S. making "groundless accusations" about normal trade exchanges with Russia.

"We are firmly opposed to the hypocritical practice of the U.S. side itself pouring fuel but blaming the Chinese side," Wang Wenbin said at a regular news briefing when questioned on the possible sanctions.

"China's right to conduct normal economic and trade exchanges with other countries, including Russia, is inviolable," said Wang.

The People's Bank of China and the National Financial Regulatory Administration, China's top banking regulator, didn't immediately respond to Reuters' requests for comments.

China and Russia have fostered more trade in yuan instead of the dollar in the wake of the Ukraine war, potentially shielding their economies from possible U.S. sanctions. The United States and other Western nations imposed sweeping sanctions on Russia's financial system after Moscow invaded Ukraine in February 2022.

Several banks in China, the United Arab Emirates and Turkey have boosted their sanctions-compliance requirements, resulting in delays or the rejection of money transfers to Moscow, Reuters reported in March. The delays show how U.S. restrictions can have a strong knock-on effect.

Banks, cautious of sanctions, have started to ask their clients to provide written guarantees that no person or entity from the U.S. SDN (Special Designated Nationals) list is involved in a deal or is a beneficiary of a payment.