China defies US sanctions over Iran oil: What it means for global financial order

China says it will block American sanctions imposed on five of its refiners accused ‌of purchasing oil from Iran. Beijing’s retaliation against extraterritorial sanctions marks a turning point in global financial and diplomatic relations. Historically, Chinese companies and financial institutions have largely complied with sanctions imposed by the United States beyond its borders, even when such measures were not formally endorsed by Beijing.

That pattern appears to be shifting. The change comes in response to Washington’s recent push to intensify enforcement of sanctions targeting Iran, as part of “Operation Economic Fury”. The United States warned global financial institutions of the risks associated with dealings involving China’s independent “teapot” oil refineries, most of which are concentrated in Shandong Province.

Tensions escalated when Washington sanctioned five Chinese refineries, accusing them of trading in Iranian petroleum. These include four so-called teapot refiners—Shandong Jincheng Petrochemical Group, Hebei Xinhai Chemical Group, Shouguang Luqing Petrochemical and Shandong Shengxing Chemical—alongside Hengli Petrochemical in Dalian, one of China’s largest private refining firms with a daily capacity of around 400,000 barrels. The US Department of State framed the move as part of a broader effort to disrupt Iran’s oil revenues, which it argues fund destabilising activities.

Under these sanctions, the targeted companies risk being cut off from the dollar-denominated financial system. Any bank, insurer or trading partner that continues to engage with them could face secondary sanctions, effectively extending Washington’s reach across global markets.

Beijing’s response represents a decisive break from past practice. Chinese ministry of commerce concluded that the US measures constitute an improper extraterritorial application of domestic law, in violation of international norms. It subsequently invoked its 2021 “Blocking Rules”—formally known as the Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation—to issue its first formal injunction against foreign sanctions. The directive was unequivocal: the US measures “shall not be recognised, shall not be enforced, shall not be complied with”.

In effect, Beijing has turned compliance with US sanctions into a legal risk within China. Any entity, domestic or foreign, that severs ties with the sanctioned firms in order to comply with Washington could now face lawsuits in Chinese courts, regulatory penalties or inclusion on a “Malicious Entity List”, potentially leading to asset freezes and trade restrictions.

This puts global businesses and financial institutions in an impossible position. They are suddenly caught between two sets of rules, with both sides threatening serious consequences for getting it wrong. For Chinese banks, the bind is especially tight: follow US sanctions and you are breaking your own country's law; ignore them and you risk being cut off from the dollar-based global financial system that keeps international trade running.

Washington does not have it easy either. If the US goes ahead and sanctions major Chinese banks for continuing to work with these refineries, it could spark a direct financial standoff between the world's two biggest economies—and nobody really knows how that ends. The global financial system wasn't built to absorb that kind of shock. But backing down is not a clean option either. 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. The whole point of secondary sanctions is that they are supposed to make third parties think twice. If they stop believing the consequences are real, the tool loses its teeth.

The timing further complicates matters. The confrontation comes just ahead of a planned visit by Donald Trump to China, where major commercial agreements—including a potential large-scale aircraft deal involving Boeing—are expected to be discussed.

Regardless of how this specific dispute is resolved, the broader rupture is already evident. China’s earlier willingness to tacitly accommodate US sanctions within its jurisdiction appears to have run its course. What is at stake now is not merely the fate of a handful of refineries, but the future viability of extraterritorial sanctions as a tool of American power.