21MAY

China activates 2021 Blocking Rules against OFAC

3 min read

09:55UTC

Beijing's MOFCOM named five refineries as legally barred from honouring OFAC's Iran sanctions, the first activation of the 2021 statute and the first Chinese countermeasure to outpace Brussels.

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Key takeaway

Beijing has armed Article 9 of the Blocking Rules; the first foreign bank to test it will set the precedent.

MOFCOM, China's Ministry of Commerce, activated its 2021 Blocking Rules for the first time on Saturday 2 May, naming five refineries as legally barred from honouring OFAC's Iran designations: Hengli Petrochemical (Dalian), Shandong Shouguang Luqing, Shandong Jincheng, Hebei Xinhai and Shandong Shengxing ¹. The order took immediate effect. The Blocking Rules are China's Order No. 1 of 2021, a statute that prohibits Chinese firms from complying with foreign sanctions; OFAC is the US Treasury's Office of Foreign Assets Control, which administers Iran sanctions through bulletin codes such as SB0472. Article 9 of the Rules creates a private cause of action in Chinese courts: any Chinese company that complies with the listed designations can be sued for damages by the sanctioned counterparty.

Hengli was OFAC-designated under SB0472 on 24 April with a wind-down clock under General License V (GL-V) that expires on 24 May . Twelve days before the activation, Hengli transferred 95% of its Singapore arm to a Chinese state entity to soften the blow . Beijing's posture has stepped two rungs higher in twelve days, moving from quiet corporate restructuring to formal legal prohibition. China simultaneously holds the United Nations Security Council presidency for May 2026; on the same day, the Council president called for 'good-faith' US-China negotiations on Iran ².

The five named firms are independent 'teapot' refineries that account for a meaningful share of Chinese plants buying Iranian crude. The mechanism runs through commercial liability: any bank, insurer or freight forwarder that turns away their cargoes faces compensation claims in Chinese courts. The European Union's own blocking statute, Regulation 2271/96, has never been invoked against the current Iran sanctions cycle, so Beijing now sits ahead of Brussels in legal posture against the Trump administration's enforcement track. The first multinational to test Article 9 in court will set the precedent for everyone else.

Deep Analysis

In plain English

China's government has a law that bars Chinese companies from obeying American sanctions when it chooses to activate it. On 2 May it activated that law for the first time, naming five Chinese oil refineries that would face legal penalties in China if they followed US Treasury orders to stop buying Iranian oil. The US had told these refineries they had until 24 May to wind down their Iran business or face further sanctions. Now any Chinese company that complies with the US order can be sued in a Chinese court. It puts the refineries in an impossible position: break US law, or break Chinese law. The outcome matters because these refineries process a large share of the Iranian oil that funds Tehran's war effort.

Deep Analysis

Root Causes

Three structural drivers converge in this event. First, China's 2021 Blocking Rules were passed precisely because Beijing anticipated future US secondary-sanctions pressure after the 2020 OFAC designations of Huawei affiliates; the Iran designation of Hengli in April 2026 triggered the exact scenario the law was drafted for.

Second, Hengli's 95% Singapore arm transfer to a Chinese state entity twelve days before activation created a legal grey zone: OFAC's GL-V wind-down addressed a privately held entity that now no longer exists in its pre-designation form. MOFCOM's order converts that grey zone into a formal barrier.

Third, China holds the UN Security Council presidency for May 2026 and was already on record calling US Iran sanctions 'illegal unilateral measures'. Activating the Blocking Rules while holding the rotating presidency gives Beijing simultaneous legal, diplomatic, and multilateral cover for a posture it could not safely hold in February.

What could happen next?

Consequence
US firms with China operations face liability in Chinese courts if they facilitate OFAC enforcement against the named refineries, creating a chilling effect on US secondary-sanctions compliance chains.
Short term · 0.75
Risk
If OFAC attempts enforcement against a Chinese state-owned entity after the 24 May GL-V expiry, and China's courts respond with a damages award against a US-linked firm, the bilateral sanctions architecture enters uncharted legal territory.
Medium term · 0.55
Precedent
The first activation of any country's blocking statute against a live US secondary-sanctions framework establishes a template other states with analogous legislation (notably Russia and Iran) will monitor for replication.
Long term · 0.7

Source Landscape

This story draws on neutral-leaning sources from China (includes China state media)

China

Primary parallel: The European Union's 1996 Helms-Burton Blocking Regulation imposed similar counter-measures against US secondary sanctions on Cuba; EU member states ultimately did not enforce it in court for 22 years, and the mechanism only acquired real teeth after the EU amended it in 2018 with a mandatory notification and injunction mechanism.

China's Article 9 private-right-of-action clause is structurally analogous: potent on paper, dependent on political will to activate in litigation.

Counter-parallel: Japan's 1987 Toshiba-COCOM case demonstrates the opposite trajectory: the US enforced technology-export controls against a Japanese firm, Japan declined to retaliate with blocking legislation, and bilateral trade relations absorbed the hit without producing a countervailing legal framework. Beijing's explicit statutory response in 2026 is therefore a deliberate departure from Tokyo's 1987 compliance model, not a rerun of it.

Immediate impact centres on Hengli's 400,000 bpd refining capacity: caught between OFAC's 24 May GL-V wind-down and the Chinese Blocking Rules prohibition on compliance, the refinery's counterparties (shipping insurers, letter-of-credit banks, commodity traders with US-clearing relationships) face a binary choice with liability on both sides.

Structurally, the activation accelerates the de-dollarisation of China's Iranian crude procurement. Hengli has three months of pre-positioned crude inventory and yuan-settlement infrastructure already in place .

Each week that OFAC enforcement depends on dollar-rail access, and Chinese state entities route around it in yuan, the enforceability of secondary sanctions against China's largest refiners decreases rather than increases. The MOFCOM order narrows the financial institutions willing to intermediate between OFAC and Chinese targets, raising enforcement costs for the US without raising supply costs for China.

Consensus view: The European Centre for International Political Economy (ECIPE) and Alicia García-Herrero at Bruegel assess Beijing's first-ever activation of the 2021 Blocking Rules as a structural shift from complaint to counter-enforcement: China is no longer lodging diplomatic protests but placing its firms inside a domestic legal shield that makes OFAC compliance a civil-liability event under Chinese law.

Counter-view: Tsinghua University's Yan Xuetong argues the activation is primarily a domestic signalling instrument, calibrated to reassure Chinese industry rather than force a US climb-down. Article 9's private right of action has never been tested in a Chinese court; the enforcement teeth depend on a judicial system that answers to the same party that would absorb the diplomatic blowback of a ruling against a US firm.

Key tension: Whether MOFCOM's Blocking Rules activation hardens into genuine bilateral legal conflict (where Chinese courts award damages against US-linked firms) or remains a deterrent posture that both sides treat as a face-saving ceiling on escalation.

First Reported In

Update #87 · China blocks OFAC; Iran writes; Trump tweets

Global Times· 3 May 2026

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Causes and effects

Caused by

GL-V opens a 24 May Iran deadline

China's Blocking Rules activation directly contests the OFAC GL-V wind-down deadline set for Hengli on 24 May.

Occurred 26 Apr 2026

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Hengli cuts Singapore arm to 5%

Hengli's 95% Singapore arm transfer to a Chinese state entity 12 days earlier escalated Beijing's posture from corporate restructuring to formal legal prohibition.

Occurred 29 Apr 2026

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This Event

China activates 2021 Blocking Rules against OFAC

First Chinese activation of the 2021 Blocking Rules converts the US-China sanctions dispute from commercial friction to a legal contest.

Led to

MOFCOM names five Chinese refineries under Blocking Rules

MOFCOM named the five protected refineries as a publication from the 2 May Blocking Rules activation (ID:2998)

Occurred 2 May 2026

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Araghchi meets Wang Yi in Beijing

MOFCOM's 2 May Blocking Rules protecting five refineries provided Beijing's counter-instrument framing ahead of the Araghchi-Wang Yi meeting on 6 May

Occurred 6 May 2026

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Beijing flips its blocking statute live

MOFCOM's initial 2 May activation of the 2021 Blocking Rules was confirmed and operationalised by Announcement No. 21 naming the specific EOs targeted.

Occurred 2 May 2026

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China splits on Hengli before Trump-Xi

MOFCOM's 2 May Blocking Rules activation (ID:2998) is the same order Bloomberg confirmed extended to NFRA's private bank instructions in this event.

Occurred 6 May 2026

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Different Perspectives

Turkey (Shakarab consideration)

Ankara serves as one of two Western-adjacent Iran back-channels while Turkish national Gholamreza Khani Shakarab faces imminent execution on espionage charges in Iran. President Erdogan cannot deflect the domestic political crisis that a Turkish execution would trigger, which would force suspension of the mediating role.

Germany (Bundestag gap)

Belgium, Germany, Australia, and France committed Hormuz coalition hardware on 18 May. Germany's Bundestag authorisation for the coalition deployment remains pending, creating a constitutional gap between the commitment announced and the parliamentary mandate required to operationalise it.

IEA and oil market analysts

The IEA's $106 May Brent projection met the market in one session on 20 May as Brent fell 5.16% on diplomatic optimism. Goldman Sachs and Morgan Stanley's two-layer premium framework holds: the kinetic component compressed; the structural insurance component tied to Lloyd's ROE remains unresolved.

Hengaw

Documented the dual Kurdish execution at Naqadeh on 21 May, the two Iraqi-national espionage executions on 20 May, and Gholamreza Khani Shakarab's imminent execution risk. The 24-hour cluster covers two executions at one facility, the first foreign-national espionage executions, and a Turkish national whose death would suspend Ankara's mediation.

Lloyd's of London

Hull rates stand at 110-125% of vessel value on the secondary market; the Joint War Committee has conditioned cover reopening on written ROE from the coalition or PGSA. The Majlis rial bill makes any compliant ROE structurally impossible to draft while the PGSA's yuan portal remains its operational mechanism.

United Kingdom and France (Northwood coalition)

The 26-nation coalition paper requires Lloyd's to see written rules of engagement before Hormuz war-risk cover reopens. The Majlis rial bill adds a second governance incompatibility on top of the unpublished PGSA fee schedule; coalition ROE cannot mention rial without conceding Iranian sovereignty over the strait.