For the first time since the Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures (the “Blocking Rules”) were enacted in January 2021, China’s Ministry of Commerce (“MOFCOM”) issued a formal blocking order, MOFCOM Announcement No. 21 of 2026, on May 2, 2026. The order targets U.S. sanctions imposed on five Chinese refinery companies in connection with alleged Iranian petroleum transactions. It prohibits Chinese entities from “recognizing, enforcing, or complying with” those U.S. measures.
1. The Compliance Dilemma for FIEs
For foreign-invested enterprises (“FIEs”) incorporated in China, the order creates a direct compliance dilemma. On the one hand, an FIE may face exposure under PRC law if it refuses to deal with a U.S.-sanctioned counterparty solely because of the sanctions designation. On the other hand, the U.S. sanctions continue to operate through global banking systems, insurance markets, logistics networks, and corporate compliance platforms, potentially making performance difficult or, in some cases, practically impossible.
Under the Blocking Rules, entities in China may be restricted from suspending, terminating, or refusing contractual performance solely because a counterparty is designated, deemed blocked, or otherwise implicated by U.S. sanctions measures. This prohibition applies broadly to Chinese legal persons, including FIEs. Article 9 of the Blocking Rules also provides a statutory basis for judicial relief where a party’s legitimate interests are harmed as a result of another party’s compliance with prohibited foreign measures. As a result, Chinese counterparties affected by the relevant sanctions-based non-performance may have incentives to pursue or threaten litigation in Chinese courts.
2. Why U.S. Sanctions Still Matter
The U.S. sanctions regime, however, does not disappear simply because China has issued a blocking order. U.S. primary sanctions generally prohibit U.S. persons, and transactions with a U.S. nexus, from dealing with SDNs. Secondary sanctions may also expose non-U.S. entities to serious consequences if they engage in significant transactions with sanctioned parties. In practice, banks, insurers, carriers, and internal group-wide compliance systems may refuse or prevent transactions involving SDN-listed parties, even where the Chinese entity itself seeks to perform.
This leaves FIEs caught between a PRC regulatory framework that restricts reliance on foreign sanctions as a basis for non-performance and a global operating environment that may create genuine external obstacles. Reported market developments suggest that Chinese regulators may also be grappling with the practical consequences of the designations. Around the same time the MOFCOM order was issued, market participants reportedly indicated that certain major financial institutions had adopted a cautious lending posture toward the five sanctioned entities and related parties pending further regulatory clarification. This suggests that even within China’s own regulatory environment, the SDN designations may create real financial and operational friction. The blocking order prohibits refusal to deal based solely on SDN status, but it does not necessarily require companies to ignore genuine external obstacles, such as loss of insurance, refusal by foreign correspondent banks, inability to obtain goods, or the absence of a commercially viable shipping route without a U.S. nexus.
3. A Practical Compliance Path -- From Sanctions Policy to Objective Obstacles
The key distinction is between actively implementing foreign sanctions as a matter of policy and being objectively unable to perform because of external constraints. Depending on the facts, companies may consider defenses available under the PRC Civil Code, including impossibility of performance, force majeure where the statutory requirements are satisfied, or, where appropriate, change of circumstances. Whether any such defense would be recognized in judicial or arbitral proceedings will depend on the contract terms, the nature and duration of the impediments, and the causal connection between those impediments and the alleged non-performance.
Accordingly, FIEs should avoid automatic sanctions-based blocking measures. Companies should not implement system rules that block transactions solely because a counterparty is subject to U.S. sanctions. Instead, each affected contract or transaction should be reviewed on its own facts. Where performance becomes objectively impossible or commercially impracticable due to external operational constraints—such as payment failure, loss of insurance coverage, carrier refusal, or lack of a commercially viable route—companies may consider invoking applicable contractual rights or statutory defenses under PRC law. At the same time, they should maintain clear documentary evidence of the relevant obstacles and reasonable efforts to identify alternative solutions.
Civil claims by affected counterparties remain possible, and administrative enforcement by MOFCOM cannot be ruled out. At present, however, the legal framework remains largely untested. Enforcement risk may be higher where a company systematically or expressly implements foreign sanctions as a matter of corporate policy, rather than where non-performance results from isolated, well-documented, and objectively verifiable operational constraints.
Companies may also consider applying to MOFCOM for an exemption under Article 8 of the Blocking Rules where compliance would create material conflicts with global operational systems, contractual obligations, or other legal requirements. Exemptions are not guaranteed, and the Blocking Rules do not expressly provide for an automatic suspension of obligations during the review period. Nevertheless, an exemption application may help demonstrate good-faith compliance efforts and may be relevant in subsequent regulatory communications.
The key takeaway for FIEs operating in China is that the MOFCOM blocking order does not necessarily require business to stop, nor does it eliminate legitimate operational constraints. Rather, it signals that automatic sanctions-based decision-making may no longer be sufficient where activities fall within China’s regulatory jurisdiction. Companies should move toward a documented, transaction-specific, and fact-based compliance framework capable of withstanding scrutiny under both PRC and foreign regulatory regimes.
Authors:
- Eva Niu, Partner of the Dentons
- Jun Song, Partner of the Dentons