With a summit between US President Donald Trump and Chinese President Xi Jinping approaching, the United States is pressing China, the largest purchaser of Iranian crude, as hard as possible to secure cooperation, but Beijing's hard-line response has added uncertainty. By issuing an unprecedented directive telling domestic companies to ignore US sanctions, assessments have emerged that America's ‘sanctions power’ is instead being put to a long-term test.

The ‘Order Prohibiting Compliance with US Sanctions’ announced by China's Ministry of Commerce on the 2nd is the first actual invocation of the ‘Measures to Block the Unjust Extraterritorial Application of Foreign Laws and Actions,’ enacted in 2021. China has long criticized sanctions unilaterally announced by the United States without going through UN Security Council resolutions as a ‘hegemonic move.’ However, it had not acted in practice in order to maintain access to the US-led financial system.

In February 2021, just before the Russia-Ukraine war, Russian President Vladimir Putin and Chinese President Xi Jinping declared “no-limits cooperation,” and China became a major supplier to the Russian market, though assessments also noted limits to the cooperation. The mere appearance of media reports that the United States was considering sanctions against Chinese financial institutions and others for alleged cooperation in laundering funds for Russian military supplies caused companies to shrink back. With respect to the EU, when it sanctioned two Chinese financial institutions in July 2025 for allegedly aiding evasion of Russia's military funding restrictions, China responded with tit-for-tat measures by sanctioning two EU-affiliated financial institutions.

The United States again played the ‘sanctions card’ as cease-fire talks in the Iran war hit a crisis. On the 24th of last month, the US Treasury announced sanctions on five companies, including China's refining giant Hengli Group, which imports oil from Iran. Earlier, it had frozen cryptocurrency valued at $344 million (about 500 billion KRW) believed to be linked to Iran, and hinted at the possibility of secondary sanctions on two Chinese banks where indications of transactions with Iran had been detected. China hit back by instructing companies to ignore US sanctions.

China suggests this move goes beyond serving as a bargaining chip for the US-China summit due in about two weeks and amounts to a ‘long-term strategy.’ In a commentary on the 3rd, the People's Daily, the Chinese Communist Party's official newspaper, said, “By the power of the rule of law, we have mounted a precise counterattack against the exercise of US ‘expanded jurisdiction,’ safeguarded our companies' rights and interests, and met the universal demand of the international community to oppose hegemony,” adding, ”Confronted with unilateralism, China will continue to make good use of external rule-of-law tools to fight boldly and skillfully.”

Bloomberg said, “China has taken a much tougher stance this time (compared with past sanctions episodes),” and noted, “As the United States holds off on sanctions on Russia, Venezuela, and Iran, this will put an already strained US sanctions regime to the test.”

China had previously tried to protect the interests of domestic firms exposed to external sanctions through litigation. In September 2023, a Chinese offshore engineering company entered into a contract worth $19.45 million for tanker equipment with a Swiss equipment firm, and when the Swiss company withheld payment of $11.86 million in fees on the grounds that the Chinese partner was subject to US sanctions, the Nanjing Maritime Court, through arbitration, ordered the recovery of the remaining balance. The ruling was entered into the Supreme People's Court of China case-law database in 2025 and was made public through state media in January.

Since the outbreak of the US-Iran war, China's countermeasures on sanctions have taken a further step. Xu Tianchen, a lead analyst at the Economist Intelligence Unit, said in an interview with the South China Morning Post that “compliance issues for companies could lead to a clash within the financial system.” Global companies now face a dilemma: if they follow US sanctions, they lose access to or cannot transact in the Chinese market; if they follow Chinese law, they become targets of US sanctions. Given the entrenched nature of the dollar-centered financial system, it may be difficult to shake the US sanctions architecture immediately, but as more companies hesitate, US sanctions will not wield the same force as before.

Zhi Yuanhua, a professor at the Institute of Economic Law at the University of International Business and Economics in Beijing, argued in an op-ed in the Economic Daily that China's move leaves room for future compromise, writing of the new prohibition that “the key is to block the legal effect of the relevant sanctions within China without simultaneously adopting stronger retaliatory measures,” and that “such an approach leaves room to resolve disputes through dialogue in the future.” Instead of legal retaliation such as tit-for-tat sanctions, responding with ‘noncompliance with the order’ would also force the United States to deliberate and could even open a path to resolve the issue informally and more easily.

Some assess that this approach is possible because China is confident it will not be outmatched in its economic war with the United States, for example by its control over rare-earth supply chains. Export controls on rare earths were also fully established in law and regulation last year amid the tariff war with the United States.

Even so, the US response remains a variable. Citing analysts at consulting firm Eurasia Group, Bloomberg reported that the move is unlikely to derail the scheduled meeting between the Chinese and US leaders, but that the US reaction will reveal whether the situation will worsen.