China boosts legal arsenal for potential sanctions war, tightening counter-sanction regulations

China is ramping up its legal arsenal to fight a potential sanctions war, by tightening up its domestic regulations to retaliate against US, European and UK sanctions.

“If war is what the US wants, be it a tariff war, a trade war or any other type of war, we’re ready to fight till the end,” the Chinese Embassy in the US said on X.

In March, China’s State Council announced updates to the anti-foreign sanctions law (AFSL), introducing new compliance and enforcement measures, while the Ministry of Commerce (MOFCOM) added 12 US entities to its export control list on April 4.

The AFSL permits China and Chinese companies to respond to organisations and individuals implementing third-country sanctions against China and its interests.

For example, the Supreme Peopleʼs Court (SPC) reported a lawsuit in which a Chinese maritime engineering firm sued its foreign supplier for suspending payments when the Chinese firm was sanctioned by a third country. As a result, the Chinese court used the AFSL to order the foreign supplier to pay the outstanding contract price after it had received a licence from the third-country regulator.

The National People’s Congress of China passed the AFSL updates on March 21, which came into force on March 23. The AFSL now contains 22 articles in total, added to the 16 initial articles published in June 2021, according to a statement.

Domestic and multinational firms operating in China are likely to face the greatest risk of being affected by the AFSL, especially companies conducting international trade. The AFSL primarily focuses on counteracting foreign “discriminatory restrictive measures” (DRM), which covers “onshore organisations and individuals” such as foreign-invested enterprises (FIEs) established in China.

Article 3 enables national authorities to act against entities that take discriminatory measures against Chinese organisations, while Article 15 lets authorities take countermeasures against foreign threats to China’s sovereignty, security or development.

On April 7, US President Donald Trump claimed in an executive order: “Research and development (R&D) expenditures by US multinational enterprises in China grew at an average rate of 13.6% a year between 2003 and 2017, while their R&D expenditures in the US grew by an average of just 5% per year during the same time period.”

“Trading partners have repeatedly blocked multilateral and plurilateral solutions, including in the context of new rounds of tariff negotiations and efforts to discipline non-tariff barriers.”

Compliance standards

Under Article 4 and 17, the expanded AFSL empowers national authorities to investigate, consult and interview parties involved in sanctions breaches, and financial institutions are required by law to assist in retrieving information on the financial activities of the relevant entities. Financial institutions must also assist with freezing cash, seizing assets or sealing other securities of involved entities and may, in special circumstances, be asked to stop certain payments linked to specific transactions, said the State Council.

Nancy Nan, a partner at a Hong Kong-based firm Anjie Law, explained: “Multinational companies, although compliant with some foreign laws — especially sanctions laws — also [have to] comply with Chinaʼs export control regulations. Within these regulations, there are often restrictions specifically protecting certain Chinese entities, individuals or China as a whole.

“These foreign laws and sanctions, though in line with Chinese regulations, could be deemed by Chinese authorities as discriminatory. If the Chinese government perceives them that way, companies may risk violating China’s anti-foreign sanctions law or other relevant PRC regulations,” she said in a webinar.

Failure to comply could result in a denial of entry, cancellation of residency or expulsion from China, with individuals facing the risk of prohibition and restriction from business activities within the country.

Unreliable entity list

While the AFRL focuses on tightening compliance standards, MOFCOM maintains an ‘unreliable entityʼ list, which was introduced in 2020 to impose punitive measures on foreign entities, to protect Chinaʼs economic interests and developments. On April 4 MOFCOM added 12 US organisations to the list, many of them key manufacturers in the US drone industry.

The listed firms are banned from all trade activities with China and prohibited access to raw materials from Chinese suppliers, said the announcement, which gave the main reason as “military technology cooperation with Taiwan”.

However, Chinese entities are facing similar sanctions overseas, with the US Department of State (DOS) banning six Beijing and Hong Kong officials for “undermining Hong Kongʼs autonomy” on March 31. According to the statement, all properties owned by the listed individuals in the US are now under the possession of the US Office of Foreign Assets Control (OFAC) and any related transactions are prohibited.

The UK Foreign, Commonwealth and Development Office (FCDO) announced 50 measures as part of its Russia sanctions regime on February 22, 2024, which included three Chinese companies.

Responding to the sanctions, a MOFCOM spokesperson said: “The UKʼs practice is a unilateral sanction without international legal basis or authorisation by the UN Security Council. It is a typical ‘long-arm jurisdictionʼ and will have a negative impact on China–UK economic and trade relations. We urge the UK to correct its wrong practices immediately and unconditionally stop listing Chinese companies for the sake of maintaining the overall situation of China–UK economic and trade relations.”