China says it will nullify American sanctions imposed on five of its refiners accused of buying Iranian oil. Beijing’s pushback against extraterritorial measures marks a turning point in global financial and diplomatic relations. Historically, Chinese firms and banks largely complied with US sanctions beyond America’s borders, even when Beijing did not formally endorse them. That pattern now appears to be changing.
The shift responds to Washington’s recent effort to tighten enforcement against Iran under “Operation Economic Fury.” The US warned global financial institutions about risks tied to dealings with China’s independent “teapot” refineries, concentrated mainly in Shandong Province. Tensions rose after the US sanctioned five Chinese refineries it accused of trading Iranian petroleum: four teapot refiners—Shandong Jincheng Petrochemical Group, Hebei Xinhai Chemical Group, Shouguang Luqing Petrochemical and Shandong Shengxing Chemical—and Hengli Petrochemical in Dalian, one of China’s largest private refiners with about 400,000 barrels per day capacity. The State Department said the move aimed to disrupt oil revenues that Washington says fund destabilising activities.
Those designated face potential exclusion from the dollar-denominated financial system. Any bank, insurer or trading partner that continues to work with them could face US secondary sanctions, extending American reach across global markets.
Beijing’s reply is a decisive break from previous practice. China’s commerce ministry judged the US measures to be an improper extraterritorial application of domestic law and invoked its 2021 “Blocking Rules” — the Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation — to issue its first formal injunction against foreign sanctions. The order was clear: the US measures “shall not be recognised, shall not be enforced, shall not be complied with.”
Practically, China has made compliance with US sanctions a legal risk at home. Any entity, domestic or foreign, that cuts ties with the sanctioned firms to comply with Washington could face lawsuits in Chinese courts, regulatory penalties or listing on a “Malicious Entity List,” potentially triggering asset freezes and trade limits.
That puts global companies and banks in a bind: follow US sanctions and break Chinese law; ignore them and risk being severed from the dollar-based system that underpins international trade. For Chinese banks the choice is particularly fraught.
Washington faces risks too. If the US sanctions major Chinese banks for continuing to serve these refineries, it could provoke a direct financial standoff between the world’s two largest economies — a shock the global financial architecture is not well set up to absorb. But retreating also carries costs: if the US shows its sanctions threats have limits, the deterrent power of secondary sanctions weakens.
The confrontation’s timing complicates matters further, coming just before a planned visit by Donald Trump to China, where significant commercial deals, potentially including a large Boeing sale, may be discussed.
Whatever the immediate outcome, the rupture is already visible. China’s earlier, tacit accommodation of US extraterritorial sanctions appears to be ending. The dispute now puts at stake not just a few refineries but the future effectiveness of extraterritorial sanctions as a tool of American influence.
