Compiled and fact-checked from primary and secondary sources | 4 May 2026
In the span of ten days in late April and early May 2026, a quiet but potentially historic confrontation took shape between the world’s two largest economies. The United States sanctioned a major Chinese petrochemical company and warned the global banking system to cut off China’s independent oil refineries. China responded — not with rhetoric alone, but with a legal instrument it had kept dormant for five years. The result is a collision that could redefine how American sanctions power operates in the modern world.
The Background: Iran’s Oil Lifeline Runs Through China
To understand what is happening, you need to understand the teapot refinery.
China’s so-called “teapot” refineries are independent, privately-owned oil processing facilities, most of them concentrated in Shandong Province along China’s eastern coast. Unlike the massive state-owned refineries operated by giants such as Sinopec, teapots are smaller, more nimble, and built to thrive on discounted crude — the kind sold cheaply by sanctioned nations including Iran, Russia, and Venezuela. They account for roughly a quarter of China’s total refinery capacity, operate with narrow and sometimes negative margins, and have been squeezed recently by tepid domestic demand.¹
The scale of the China-Iran oil relationship is striking. According to commodities data firm Kpler, China bought more than 80 percent of all the oil Iran shipped in 2025.¹ The U.S. Treasury Department states the figure is approximately 90 percent of Iran’s oil exports, with teapot refineries accounting for the majority of those imports.² In Washington’s characterisation, this revenue “ultimately benefits the Iranian regime, its weapons programs, and its military.”²
The U.S. Move: “Operation Economic Fury”
The Trump administration’s escalation was part of a broader economic campaign dubbed “Operation Economic Fury” — a deliberate play on “Operation Epic Fury,” the military codename for the February 2026 U.S.-Israeli airstrikes that opened the war with Iran.³
Since March 2025, OFAC had already been sanctioning smaller teapot refineries, logistics firms, and vessels linked to Iran’s shadow fleet. But on 24 April 2026, the Treasury Department’s Office of Foreign Assets Control (OFAC) crossed a significant threshold: it added Hengli Petrochemical (Dalian) Refining Co., Ltd. to the Specially Designated Nationals (SDN) List.⁴
Hengli is no small teapot. It is one of China’s largest private-sector refining and petrochemical complexes, located on Changxing Island in Dalian, with a daily processing capacity of around 400,000 barrels.¹¹ The U.S. Treasury called Hengli “one of Tehran’s most valued customers,” alleging it had generated hundreds of millions of dollars in revenue for the Iranian military through crude oil purchases since at least 2023, including from sanctioned “shadow fleet” vessels.¹ The legal authority invoked was Executive Order 13902, signed during Trump’s first term on 10 January 2020, which authorises sanctions against Iran’s oil, petrochemical, metals, and construction sectors — as well as Executive Order 13846 of 6 August 2018.⁴
Alongside Hengli, approximately 40 shipping companies and vessels alleged to be part of Iran’s shadow fleet were also sanctioned in the same round.⁴ The other four refineries subsequently covered by the MOFCOM order — Shandong Jincheng Petrochemical Group, Hebei Xinhai Chemical Group, Shouguang Luqing Petrochemical, and Shandong Shengxing Chemical — had been sanctioned in earlier rounds beginning in 2025.¹
On 28–29 April 2026, the Treasury Department escalated further. Treasury Secretary Scott Bessent confirmed he had sent direct letters to Chinese banks warning of secondary sanctions if they continued facilitating Iran-related transactions.³ The department then issued a formal alert to global financial institutions, warning of the “sanctions risks associated with independent ‘teapot’ oil refineries in China.”² The guidance urged banks to implement risk-based controls, conduct enhanced due diligence on transactions involving Shandong Province-based refineries, and specifically flagged Iranian oil disguised as “Malaysian blend” — a common evasion tactic in which Iranian crude is blended with oil from third countries to obscure its origin.²
China’s Response: A Legal Weapon Five Years in the Making
China’s counter-move was swift, deliberate, and unprecedented.
On 2 May 2026 — while many countries were observing the International Workers’ Day holiday — China’s Ministry of Commerce (MOFCOM) issued Announcement No. 21 of 2026: a prohibition order under China’s Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures, known as the Blocking Rules.⁵
The operative language was built on three unambiguous negatives: the U.S. sanctions against the five named refineries “shall not be recognized, shall not be enforced, shall not be complied with.”⁷ Every Chinese citizen, company, and organisation was directed to apply those three prohibitions to the U.S. sanctions measures, including SDN listing, asset freezes, and transaction prohibitions.⁵
MOFCOM declared that the U.S. sanctions “improperly” restricted Chinese companies from conducting normal business with third countries “in violation of international law and the basic norms governing international relations.”¹ The order was issued to “safeguard national sovereignty, security and development interests.”⁵
What makes this historically significant is not just the content of the order — it is the fact that it was used at all. China’s Blocking Rules had been issued and entered into force on 9 January 2021. For more than five years, they went entirely unused — widely described by legal analysts as a framework in search of enforcement.⁶ ⁸ As Fortune wrote on 4 May 2026: “Until last weekend, Beijing’s statutes were a paper tiger. With the issuance of Announcement No. 21, that changed.”⁷
How the Blocking Rules Work — and Why They Matter
The Blocking Rules, promulgated January 2021, were designed to counter secondary sanctions: measures by which the United States not only targets Chinese firms directly, but pressures banks, insurers, shippers, and trading companies in third countries to sever ties with those Chinese firms — or face U.S. penalties themselves.⁶
China’s position is that this constitutes unlawful extraterritorial interference in China’s economic order. The rules drew consciously on the EU Blocking Statute, a comparable European mechanism.⁶ But unlike the EU’s instrument, which has never meaningfully constrained U.S. sanctions enforcement, China’s order comes backed by the world’s second-largest economy and leverage as the single largest buyer of sanctioned nations’ oil.
The practical mechanics are now as follows: if a U.S. or foreign bank, trader, insurer, or shipping company were to sever ties with one of the five named refineries in order to comply with U.S. sanctions, that refinery can now sue for damages in a Chinese court.⁷ Any entity operating within China’s jurisdiction — including foreign-invested enterprises — faces potential legal exposure under Chinese law if it complies with the American sanctions.
As Steve H. Hanke and Jeffrey Weng wrote in Fortune on 4 May 2026: Announcement No. 21 “activates, for the first time, a private right of action” — its implications are “sweeping.”⁷ The deliberate catch-22 for multinationals is the point: comply with U.S. sanctions and risk Chinese litigation; comply with China’s blocking order and risk U.S. secondary sanctions.
The Broader Legal Escalation: China’s Counter-Sanctions Architecture
The Blocking Rules prohibition order did not arrive in isolation. It is the latest activation in a rapidly accelerating Chinese counter-sanctions legislative framework built since 2020.
In April 2026 alone, China’s State Council promulgated two sweeping new instruments. Decree No. 834 on the Security of Industrial and Supply Chains took effect on 7 April 2026. Less than a week later, on 13 April 2026, the State Council issued Decree No. 835, the Regulations on Countering Foreign Improper Extraterritorial Jurisdiction, also with immediate effect.⁸
These decrees systematised, elevated, and expanded the existing toolkit — integrating the Unreliable Entity List (UEL), the 2021 Blocking Rules, and the Anti-Foreign Sanctions Law (AFSL, passed June 2021) into a more comprehensive, multi-agency counter-sanctions architecture.⁸
Morgan Lewis summarised the combined effect in a 15 April 2026 client alert: a single corporate decision — such as a multinational halting transactions to comply with U.S. export controls — can now simultaneously trigger supply chain investigations under Decree 834, extraterritorial jurisdiction countermeasures under Decree 835, AFSL counter-sanctions, and UEL designation.⁸ Decree 835 also introduces a new “Malicious Entity List”, which targets any entity that “promotes or participates in implementing” foreign improper extraterritorial measures — potentially capturing public advocacy and lobbying, not just direct implementation.⁸
Enforcement is no longer theoretical. As Jones Day confirmed in April 2025, China’s Supreme People’s Court had already published its first civil case under the Anti-Foreign Sanctions Law: a Chinese marine engineering company sued a foreign equipment supplier in the Nanjing Maritime Court after the supplier suspended payments when the Chinese company was sanctioned by a third country. The case settled for RMB 99.7 million.⁹ Crucially, Jones Day’s analysis confirmed that as recently as April 2025, MOFCOM had never yet formally blocked a foreign sanction despite having the authority since 2021 — making Announcement No. 21 a genuine first.⁹
The Dilemma for Washington — and the World
For the Trump administration, the confrontation presents a genuine strategic dilemma.
The logic of secondary sanctions depends entirely on credibility: the threat works only if third parties believe the consequences are real. If Chinese banks and international firms calculate that Beijing’s blocking order provides adequate legal shelter to continue dealing with the sanctioned refineries, the sanctions regime loses its bite. As Ajish P Joy wrote in The Week India on 4 May 2026: “If Washington blinks, it sends a signal that its sanctions threats have limits — and once that credibility is gone, it is very hard to get back.”¹¹
But escalating carries its own costs. The next logical step — sanctioning major Chinese banks — would trigger a direct financial standoff between the world’s two largest economies. “The global financial system wasn’t built to absorb that kind of shock,” the same analysis noted.¹¹
The timing adds another layer of complexity. Trump is scheduled to visit Beijing on 14–15 May 2026 for a summit with President Xi Jinping — the first U.S. presidential visit to China in eight years.⁷ On the agenda: the Iran war and its energy shock, trade relations, Taiwan, AI chip controls, rare earths, and sanctions. Major commercial agreements, including a potential large-scale Boeing aircraft deal, are reportedly under discussion.¹¹ Hanke and Weng argued in Fortune that Announcement No. 21 is China’s deliberate “welcome mat” for Trump’s arrival: “The message to the American delegation is unmistakable — the rules of the road are being rewritten, and they are being rewritten in Beijing.”⁷
What It Means for the Future of American Sanctions Power
Beyond the immediate dispute, analysts say China’s activation of its Blocking Rules signals a structural shift in the geopolitics of economic coercion.
“China’s earlier willingness to tacitly accommodate US sanctions within its jurisdiction appears to have run its course,” The Week India observed.¹¹ For decades, Washington’s sanctions architecture operated on the implicit assumption that no major counterparty would deploy a credible legal counter-weapon. China’s move is categorically different from the EU’s underenforced blocking statute — it is backed by the world’s second-largest economy, a domestic market of 1.4 billion people, and the leverage of being the primary buyer for the oil of multiple sanctioned nations.
As Hanke and Weng concluded in Fortune: “China leads the BRICS, and the BRICS will follow Beijing’s template. For decades, Washington projected its sanctions architecture on the assumption that no major counterparty would counterattack with a reciprocal one. That assumption expired on May 2.”⁷
Timeline of Key Events
| Event | Date |
|---|---|
| Executive Order 13846 (Iran sanctions authority) | 6 August 2018 |
| Executive Order 13902 (Iran sector sanctions) | 10 January 2020 |
| MOFCOM Blocking Rules issued (first ever) | 9 January 2021 |
| China’s Anti-Foreign Sanctions Law enacted | 10 June 2021 |
| State Council Decree No. 834 (Supply Chain Security) | 7 April 2026 |
| State Council Decree No. 835 (Counter Extraterritorial Jurisdiction) | 13 April 2026 |
| OFAC adds Hengli Petrochemical to SDN List; ~40 shadow fleet entities sanctioned | 24 April 2026 |
| Treasury Secretary Bessent sends warning letters to Chinese banks | ~28 April 2026 |
| OFAC issues formal alert to global financial institutions | 29 April 2026 |
| MOFCOM issues Announcement No. 21 — first-ever Blocking Rules order | 2 May 2026 |
| Trump-Xi summit, Beijing | 14–15 May 2026 |
Footnotes
¹ Al Jazeera. “China blocks US sanctions against five ‘teapot’ refineries.” By Zsombor Peter and Reuters. 3 May 2026. https://www.aljazeera.com/economy/2026/5/3/china-blocks-us-sanctions-against-five-teapot-refineries (Verified via direct URL fetch, 4 May 2026)
² U.S. Department of the Treasury / OFAC. “Treasury Warns of Sanctions Risks Linked to China-Based Independent ‘Teapot’ Oil Refineries.” Official press release, 29 April 2026. https://home.treasury.gov/news/press-releases/sb0476. Full OFAC guidance: https://ofac.treasury.gov/media/935546/download?inline= (Confirmed via Treasury.gov fetch and OFAC PDF)
³ Semafor (Eleanor Mueller). “Treasury directs banks to steer clear of China’s ‘teapot’ refineries.” 28 April 2026. https://www.semafor.com/article/04/28/2026/treasury-directs-banks-to-steer-clear-of-chinas-teapot-refineries (Verified via direct URL fetch, 4 May 2026)
⁴ Geopolitechs (Substack). “China Uses Blocking Law for First Time to Counter U.S. Sanctions on Chinese Teapot Refineries Before Trump Visit.” 2 May 2026. https://www.geopolitechs.org/p/china-uses-blocking-law-for-first (Verified via direct URL fetch; cites OFAC SDN update, MOFCOM Announcement No. 21, and EO texts)
⁵ MOFCOM (People’s Republic of China). “Announcement No. 21 of 2026: Prohibition Order Concerning U.S. Sanctions Against Five Chinese Companies over Iran-related Oil Transactions.” 2 May 2026. Chinese original: https://www.mofcom.gov.cn/zwgk/zcfb/art/2026/art_0ff88c45f1974962a539775085014888.html. MOFCOM Spokesperson Q&A: https://www.mofcom.gov.cn/syxwfb/art/2026/art_a8eb0fb2d04f4096bdc64517c06108b4.html (Official government source)
⁶ Gibson Dunn & Crutcher. “China’s ‘Blocking Statute’ — New Chinese Rules to Counter the Application of Extraterritorial Foreign Laws.” January 2021. https://www.gibsondunn.com/chinas-blocking-statute-new-chinese-rules-to-counter-the-application-of-extraterritorial-foreign-laws/ (Legal analysis of January 2021 Blocking Rules)
⁷ Fortune (Steve H. Hanke and Jeffrey Weng). “China has a welcome mat for Trump: it just rewrote the rules on U.S. sanctions.” [Opinion/Commentary]. 4 May 2026. https://fortune.com/2026/05/04/china-announcement-21-us-sanctions-trump-xi-beijing-summit/ (Verified via direct URL fetch; Trump-Xi dates 14–15 May 2026 confirmed in this article)
⁸ Morgan Lewis LawFlash. “China Issues New Regulations on Countering Foreign Extraterritorial Jurisdiction: What MNCs Need to Know.” 15 April 2026. https://www.morganlewis.com/pubs/2026/04/china-issues-new-regulations-on-countering-foreign-extraterritorial-jurisdiction-what-mncs-need-to-know (Verified via direct URL fetch; confirmed Decree 834 dated 7 April 2026, Decree 835 dated 13 April 2026)
⁹ Jones Day. “China Boosts Enforcement of Anti-Foreign Sanctions Law.” April 2025. https://www.jonesday.com/en/insights/2025/04/china-boosts-enforcement-of-antiforeign-sanctions-law (Verified via direct URL fetch; confirmed RMB 99.7 million settlement and that no blocking order had been issued prior to 2026)
¹⁰ Morrison Foerster. “China Issues New Regulations Countering Foreign States’ Extraterritorial Restrictive Measures.” April 2026. https://www.mofo.com/resources/insights/260420-china-issues-new-regulations-countering-foreign-states (Secondary legal analysis confirming Decree 835 details and “Malicious Entity List”)
¹¹ The Week India (Ajish P Joy). “China defies US sanctions over Iran oil: What it means for global financial order.” Updated 4 May 2026. https://www.theweek.in/news/world/2026/05/04/china-defies-us-sanctions-over-iran-oil-what-it-means-for-global-financial-order.html (Verified via direct URL fetch; Hengli 400,000 bpd capacity and Boeing deal confirmed here)
Editor’s Note on Source Verification: All 11 footnoted sources were checked in this verification pass (4 May 2026). Footnotes 1, 3, 4, 7, 8, 9, and 11 were confirmed via direct URL fetch with full article content retrieved. Footnotes 2 and 5 were confirmed via official government domains (U.S. Treasury and MOFCOM). Footnote 6 (Gibson Dunn) was confirmed via search snippet and cross-corroborated by Morgan Lewis (footnote 8) and Jones Day (footnote 9), all of which independently confirm the 9 January 2021 Blocking Rules date and their previously unused status. The CNBC article cited in the original draft was removed as it returned a 403 error and its content is fully covered by the verified Treasury press release (footnote 2) and Semafor article (footnote 3).
