China’s Rare Defiance of US Sanctions Sparks Showdown Over Banks

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(Bloomberg) — China has ordered companies to defy US sanctions for the first time, a step that threatens to put its banking sector into the crosshairs of competition between the world’s largest economies.

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The decision, announced on Saturday, risks becoming a watershed moment. While China has often railed against unilateral sanctions, it has in the past quietly allowed companies to comply with them to avoid blowback on its own economy and preserve access to the US financial system.

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Beijing is now signaling a far firmer stance against such restrictions by directing companies not to abide by US sanctions on five domestic refiners linked to the Iranian oil trade.

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A commentary on the People’s Daily app, the Communist Party mouthpiece, called the announcement “a pivotal step in the transition of China’s foreign-related legal weapon from institutional reserves to practical application.”

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The move represents Beijing’s most aggressive action to date in countering Washington’s financial statecraft, setting up a showdown before a long-awaited meeting between President Donald Trump and his counterpart Xi Jinping later this month. It comes with the US sanctions system already under strain, as Washington vacillates on restrictions against Russia, Venezuela and Iran.

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China is deploying a blocking measure introduced in 2021 that was aimed at protecting its firms from foreign laws it deemed unjustified. The refiners — including Hengli Petrochemical (Dalian) Refinery Co. which was sanctioned last month, and several other privately-owned processors — had been facing asset freezes and transaction bans.

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Lenders working with Hengli and other private processors are scrambling to understand the decision and are seeking clarity from the banking regulator. Public holidays in China this week allow them some time, since business is on hold, as does the grace period provided by the Treasury Department’s Office of Foreign Assets Control.

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“Judging by its specific provisions, the prohibition order primarily targets the concrete US sanctions imposed on particular Chinese firms,” Ji Wenhua, a law professor and adviser to the Commerce Ministry, wrote in an opinion piece for the state-run Economic Daily. “Its central objective is to nullify their legal effect within Chinese territory, rather than simultaneously resorting to more aggressive retaliatory measures.”

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The US measures unlawfully restrict normal trade with third countries and breach international norms, the country’s Commerce Ministry said in a statement on Saturday. It banned recognition, enforcement, and compliance with the sanctions aimed at the five companies.

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“The Chinese government has consistently opposed unilateral sanctions that lack authorization from the United Nations and a basis in international law,” the department said.