(Bloomberg) — China has ordered companies to ignore U.S. sanctions for the first time, a move that threatens to put its banking sector at the center of competition between the world’s largest economies.
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The decision announced on Saturday has the potential to be a watershed moment. While China has often opposed unilateral sanctions, it has quietly allowed companies to comply with them in the past to avoid a hit to its own economy and preserve access to the U.S. financial system.
Beijing is now signaling a firmer stance on such restrictions by instructing companies not to comply with U.S. sanctions on five domestic refineries linked to Iranian oil trade.
Bags of polyester chemicals await shipment at Hengli Petrochemical’s new refining and petrochemical complex on Changxing Island, Dalian, Liaoning Province, China, on July 16, 2018. The photo was taken on July 16, 2018. Reuters/Chen Aizhu ·Reuters/Reuters
A commentary in People’s Daily, the Communist Party’s mouthpiece, called the announcement “a key step in the transformation of China’s foreign-related legal weapons from institutional reserves to actual use.”
The move is Beijing’s most aggressive action yet against Washington’s financial statecraft, setting up a showdown ahead of a long-awaited meeting between President Donald Trump and Xi Jinping later this month. Meanwhile, the U.S. sanctions system is already under pressure, with Washington dithering over restrictions on Russia, Venezuela and Iran.
China is deploying lockdown measures introduced in 2021 aimed at protecting its businesses from foreign laws it deems unreasonable. Refiners including Hengli Petrochemical (Dalian) Refining Co. and several other private processors, which were sanctioned last month, have been facing asset freezes and trading bans.
Lenders who work with Hengli and other private processors are scrambling to understand the decision and seeking clarification from banking regulators. A public holiday in China this week gives them some time as operations are suspended, as is a grace period provided by the Treasury Department’s Office of Foreign Assets Control.
“Judging from the specific terms, the ban mainly targets specific sanctions imposed by the United States on specific Chinese companies,” Ji Wenhua, a law professor and adviser to the Ministry of Commerce, wrote in an opinion piece in the state-run Economic Daily. “The core goal is to remove its legal effect within China, rather than simultaneously taking more aggressive retaliatory measures.”
China’s Ministry of Commerce said in a statement on Saturday that the U.S. measures illegally restrict normal trade with third countries and violate international norms. It prohibits the recognition, enforcement and compliance of sanctions against the five companies.
“The Chinese government has always opposed unilateral sanctions that lack U.N. authorization and international legal basis,” the department said.
Analysts at Eurasia Group said that while the blockade was unlikely to derail a summit between Xi Jinping and Trump, Washington’s reaction to it would indicate whether matters escalated.
“Refiners mainly work with Chinese banks which have not yet been directly sanctioned,” analysts led by Dominic Chiu wrote in a note. “If the United States imposes secondary sanctions on these institutions or major state-owned entities, Beijing may take stronger countermeasures.”
China has long been the single largest buyer of Tehran’s oil shipments, much of which arrives indirectly through private refineries and is then converted into gasoline, diesel and other petroleum products. Chinese customs data do not reflect this trade, with the last official shipment recorded several years ago.
Before Hengli, Washington’s efforts to cut off Tehran’s oil revenues had mostly targeted smaller Chinese companies and facilities, wary of economic and diplomatic fallout. In contrast, Hengli represents China’s most modern private refinery, with a huge oil processing and chemical complex in the northeastern Liaoning province.
While the country still has an army of small independent players (the original so-called teapots), larger entities have now become mega-corporations. In a country that prioritizes energy security, the private sector accounts for as much as a third of refining capacity.
Eurasia analysts said the ban “allows refiners to seek compensation from Chinese courts against entities complying with U.S. sanctions, including domestic actors such as banks, investors and downstream customers that have stopped trading, as well as foreign companies operating in China”. It added that the move showed Beijing was taking a more assertive approach in countering sanctions.
“China has initiated blockade measures for the first time since the rule was adopted in 2021, demonstrating that China has a low threshold for deploying legal and regulatory tools to respond to U.S. sanctions,” they said.
