China on May 2 ordered companies not to comply with US sanctions on five domestic oil refiners, including Hengli Petrochemical (Dalian) Refinery, signalling a major shift in Beijing’s approach to Washington’s financial tools. The instruction uses a 2021 blocking mechanism and aims to nullify the effect of the US measures inside China. The step risks dragging Chinese banks into a direct clash with US penalties and comes ahead of a planned meeting between President Xi Jinping and President Donald Trump later in May. Banks and regulators are seeking clarity while holidays and a US grace period give them short breathing space.

What Beijing did and why it matters

On May 2, Beijing told Chinese firms not to recognise, enforce or comply with US sanctions aimed at five refiners linked to the Iranian oil trade. One of the companies singled out is Hengli Petrochemical (Dalian) Refinery, which the US placed under measures in April. Chinese authorities invoked a blocking measure that was adopted in 2021. That law is meant to shield Chinese firms from foreign rules Beijing deems unfair.

The Commerce Ministry framed the move as a defence of normal trade and international law. It said US measures unlawfully restrict trade with third countries. The ministry also announced a ban on recognising or enforcing the US restrictions against the five companies. Beijing stopped short of calling for broader retaliatory action in the same statement. The instruction is nonetheless the firmest use yet of China’s anti-sanctions set of tools.

Public commentary in state channels presented the decision as a transition from keeping legal protections on the shelf to actually using them. Commentators described the step as a practical application of tools that until now had been mostly symbolic. That messaging is aimed at both domestic and foreign audiences. It signals a new readiness to accept legal friction with Washington rather than avoid short-term costs by complying quietly.

How banks and businesses are reacting

Chinese lenders that do business with the sanctioned processors are racing to work out what the order means for existing contracts, payments and correspondent banking relationships. Several banks sought guidance from the banking regulator after the announcement.

The decision arrives during public holidays in China, giving some breathing room because many transactions are paused.

At the same time, the US Treasury’s Office of Foreign Assets Control has built in a grace period for some of the recent measures. That delay reduces the immediate risk of frozen dollar payments. But lenders still face a choice. They can follow Beijing’s blocking order and risk running afoul of US secondary sanctions. Or they can comply with Washington and break the Chinese instruction. Either path carries costs.

Legal advisers inside China say the blocking order mainly aims to strip US sanctions of legal effect within Chinese territory. Ji Wenhua, law professor and adviser to the Commerce Ministry, wrote that the measure targets specific US sanctions on named Chinese firms and intends to nullify their force inside China rather than escalate with further punitive steps. Banks need to weigh that domestic legal protection against possible consequences in dollar markets.

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Part of a wider change in China’s economic tools

The move follows a broader trend in Beijing’s handling of economic coercion. Over recent years, China has built a set of rules and lists that give it more formal leverage in trade and technology disputes. Those include an Unreliable Entities List, an Anti-Sanctions Law and tightened export controls. Officials have used these tools with growing frequency and specificity.

In the past year Beijing used sanctions and trade measures that analysts say moved beyond mere symbolism. For example, Chinese restrictions on a US drone maker in October 2024 cut the company off from Chinese suppliers and caused supply chain disruption. In January 2025, Chinese authorities added multiple US firms to an Unreliable Entities List. Those steps show China can impose costs when it chooses to do so, and that such costs can ripple through global supply chains.

The recent blocking order applies that shift to the oil and banking sphere. It aims to protect Chinese firms engaged in trade connected to Iran. The action brings into play complex questions about international payments, correspondent banking and access to US dollar clearing for Chinese lenders.

Economic stakes and wider effects

At stake is more than a dispute over five refiners. The clash exposes fault lines in the global financial system that rely on US rules and dollar clearing. If Chinese firms or banks flout US sanctions under Beijing’s instruction, they risk losing access to dollar payments chains. That would raise borrowing costs and complicate trade finance for Chinese companies with international operations.

Conversely, if Chinese banks sidestep Beijing’s order and comply with US restrictions, they face political and legal pressure at home. The dilemma could prompt banks to change business models, reroute transactions away from dollar clearing, or demand higher risk premia on contracts tied to jurisdictions under US sanctions. Any of those shifts would affect global trade costs and supply chains, especially for energy and commodities tied to sanctions regimes.

For foreign firms with exposure to China, the incident is a reminder that regulatory risk now travels both ways. Companies that relied on Chinese suppliers can find their operations disrupted by Chinese measures. At the same time, firms that depend on US markets or dollar financing can be affected by Washington’s reach. The combined squeeze narrows easy options for multinational businesses operating in both spheres.

The timing is striking. Leaders from Beijing and Washington were due to meet later in May. The move sets up a high-stakes backdrop to those talks. Beijing framed the order as a legal response to unilateral US action. Washington will need to decide how forcefully to respond without escalating financial pain for global markets.

At the same time the US sanctions system already faces pressure from competing priorities, including measures tied to Russia, Venezuela and Iran. Beijing’s instruction is likely to become a bargaining chip in diplomacy. But it's also a test of whether legal shields at home can actually protect companies from penalties enforced extra-territorially by another major power.

Prior episodes show possible transmission channels for pain. When China restricted supplies of critical minerals or cut off components to targeted firms, the effects moved quickly through global suppliers. The Skydio example in late 2024 left the company scrambling for parts when Chinese suppliers were prohibited from selling crucial components. That case shows Beijing’s measures can inflict economic costs even without hitting the largest global names.

The current dispute centres on oil trade and banking, but the mechanism is familiar. Tightened controls, blacklists and blocking rules can be used in tandem. When one side freezes transactions, the other side can try to blunt the effect by neutralising legal force domestically. What changes now is the willingness to use that neutralisation openly.

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The instruction sets a tense backdrop to planned talks between Beijing and Washington later in May, and will be an early test of whether China’s domestic legal shields can blunt extra-territorial US enforcement.

This article was created with AI assistance.