China invokes Blocking Rules for first time to combat US sanctions

Beijing is becoming more confident in using its weapons for international lawfare.

On May 2, China’s Ministry of Commerce (MofCom) directed Chinese entities not to recognize, enforce, or comply with US sanctions on five Chinese refiners blacklisted for handling Iranian crude (Xinhua).

• This marks the first invocation of MofCom’s 2021 Blocking Rules.

Some context: On April 24, the US Treasury announced it had sanctioned a fifth Chinese teapot refiner – Hengli Petrochemical (Dalian) – for processing Iranian crude, having added the first four last year.

• The sanctions effectively cut the refiners from the US dollar financial system, while exposing foreign counterparties dealing with them to the risk of secondary sanctions.

Sanctioning Hengli – China’s second-largest private teapot refiner – seems to have been the final straw for Beijing.

• Given the refiner's size, the sanctions could create meaningful disruptions across the petrochemical supply chain.

Get smart: Chinese banks servicing the refiners are most exposed to the Blocking Rules.

• Those banks are expected to follow the blocking order, risking exposure to US secondary sanctions.
• If Washington takes action against those banks, US-China relations could enter a retaliatory spiral that could blow up the Trump-Xi summit planned for May 14-15.
• We still see the probability of such escalation before the summit as low, but the downside risk is real.

Get smarter: Beijing is leaving room for escalation by relying on the Blocking Rules rather than recently passed State Council regulations to counter improper extraterritorial jurisdiction.

• Invoking the State Council regulations would cast a much wider net, putting foreign entities directly in the crosshairs of Chinese countermeasures for complying with US sanctions.