China has announced it will not recognize or enforce U.S. sanctions placed on five Chinese refiners accused of buying oil from Iran, marking a clear break with past practice and escalating a diplomatic and financial standoff. For years, many Chinese companies and banks quietly complied with U.S. extraterritorial sanctions even when Beijing did not formally endorse them. That tacit accommodation now appears to be unraveling.
The dispute follows a recent U.S. push to tighten enforcement against Iranian oil sales as part of an initiative called “Operation Economic Fury.” Washington warned global financial institutions about risks tied to dealings with China’s independent “teapot” refineries—smaller private processors concentrated mainly in Shandong Province—and then sanctioned five Chinese firms alleged to have traded in Iranian petroleum. The designated companies include four teapot refiners: Shandong Jincheng Petrochemical Group, Hebei Xinhai Chemical Group, Shouguang Luqing Petrochemical, and Shandong Shengxing Chemical, as well as Hengli Petrochemical in Dalian, one of China’s largest private refiners with roughly 400,000 barrels per day of capacity.
U.S. officials say the measures aim to choke off oil revenues that Washington argues support destabilizing activities in the region. The sanctions threaten to cut the targeted firms off from dollar-denominated finance: banks, insurers, or trading partners that continue to work with them could face secondary penalties, effectively extending U.S. reach across global markets.
Beijing responded by invoking its 2021 Blocking Rules—the Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation—and issued a formal order declaring the U.S. measures an improper extraterritorial application of domestic law. The Chinese commerce ministry directed that the sanctions “shall not be recognized, shall not be enforced, shall not be complied with,” and warned that entities in China that sever ties with the sanctioned firms to comply with U.S. demands could face legal action, regulatory sanctions, or placement on a “Malicious Entity List” with possible asset freezes and trade penalties.
That stance transforms compliance with U.S. secondary sanctions into a legal risk inside China, leaving multinational banks and businesses trapped between competing legal regimes. Chinese lenders, in particular, face a stark dilemma: adhere to U.S. sanctions and violate Chinese rules, or follow Beijing’s directive and risk being excluded from the dollar-based global financial system that underpins international commerce.
The United States also faces no easy choices. Escalating penalties against major Chinese financial institutions could precipitate a direct financial conflict between the world’s two largest economies—a shock the global financial architecture is ill-equipped to absorb. Yet retreating from enforcement would undermine the credibility of secondary sanctions, reducing their deterrent effect.
The confrontation comes just before an expected visit by former U.S. president Donald Trump to China, where significant commercial deals, including potential aircraft transactions, are on the agenda. Regardless of how the immediate dispute over five refineries is settled, the episode signals a broader rupture: Beijing’s earlier, tacit willingness to accommodate U.S. extraterritorial sanctions appears to be eroding, raising questions about the future effectiveness of such measures as an instrument of American foreign policy.