China’s counter-sanctions regime reshapes lender risk

When the US Department of Commerce escalated sanctions against Russia, Iran, Venezuela and North Korea, and started systematically placing major Chinese technology and telecommunications companies, including Huawei and ZTE, on the Bureau of Industry and Security (BIS) Entity List in 2018, the prevailing approach for businesses and lenders was straightforward: assess exposure, comply with the relevant restrictions, unwind affected relationships and, where necessary, cease dealings and cut off all communications before the applicable deadline. Any resulting losses were generally absorbed as a cost of compliance. Chinese financial institutions were particularly cautious. With limited alternatives to the US dollar and the SWIFT payments messaging system, most were unwilling to risk being cut off.

Eight years later, China's response has fundamentally altered this paradigm, and the international sanctions environment now looks markedly different.

On 10 June 2021, China enacted the Anti-Foreign Sanctions Law (AFSL) which, amongst other things, prohibits “any organisation or individual” from implementing or assisting in the implementation of discriminatory restrictive measures taken by a foreign country against Chinese citizens or entities.

The legislation was subsequently strengthened on 23 March 2025, when the State Council issued implementing rules that clarified the law's scope and introduced more detailed enforcement mechanisms. On 2 May 2026, the Ministry of Commerce (MOFCOM) issued a prohibition order in response to US sanctions targeting five Chinese oil refineries. This marked the first formal use of Chinese legal measures to block the extraterritorial impact of foreign sanctions on Chinese persons and entities.

The AFSL now operates alongside a broader suite of economic security measures, including China's Unreliable Entity List and export control framework. Collectively, these instruments increasingly resemble the sanctions and export control regimes of the US and the EU. What was initially viewed by many as a largely symbolic response to Western sanctions has evolved into a sophisticated legal framework capable of imposing meaningful countermeasures against foreign governments, companies and individuals.

Judicial developments have also followed. The Supreme People's Court recently added two AFSL-related cases to its official case database. This is a significant development as decisions included in the official case database will serve to guide lower courts.

The first case, involving the Nanjing Maritime Court, arose from a contract between a Chinese company and a European company for works relating to a floating production storage and offloading (FPSO) vessel. Although the works had been completed and accepted, the Chinese contractor became the subject of US sanctions before payment was made. The European counterparty subsequently withheld payment and ceased communications. The Chinese company commenced proceedings in China, and the court accepted jurisdiction under the AFSL despite the existence of an arbitration agreement in the underlying contract. The matter was ultimately resolved through court-facilitated mediation, resulting in the Chinese company's full recovery of the disputed amount through a structured settlement carefully designed to navigate both US and Chinese legal requirements.

The second case, involving the Shanghai Maritime Court, arose from a contract between a Hong Kong company (the shipper) and a Singapore shipping company (the carrier) to ship electronic products from Shanghai to Panama. After receiving and loading the cargo, the Singapore carrier refused to issue a bill of lading on the grounds that the Hong Kong company had been placed on a sanctions list by a foreign country. Upon the cargo's arrival at the destination port, the carrier further refused to deliver the goods and unilaterally arranged for the cargo to be returned to the Port of Shanghai without authorisation. The shipper commenced legal proceedings. The court held that the carrier’s refusal to perform its obligations based solely on foreign unilateral sanctions, including potential risk of secondary sanctions, constituted a fundamental breach of contract.

The judgments establish some clear principles. Risk or fear of unilateral sanctions is not a defence for breach of contract. Chinese courts can accept jurisdiction where the AFSL applies, even if the parties have agreed on international arbitration.  

For international lenders, this creates a particularly difficult dilemma. Sanctions related draw-stops, repeating representations, mandatory prepayments and accelerations, which have long been regarded by lenders to be a "safe harbour" for complying with sanctions regimes, could now result in significant legal consequences and reputational risk. Not choosing Chinese law as the governing law for contracts, or agreeing on international arbitration or submitting to the jurisdiction of a non-Chinese court, may not provide sufficient mitigation if the AFSL applies. Overcompliance with unilateral sanctions, which has not been an uncommon practice for lenders, now comes with the potential for increased AFSL litigation risk.

While the long-term trajectory of geopolitical competition remains uncertain, one conclusion is becoming increasingly difficult to dispute: China's counter-sanctions regime is no longer merely declaratory. As geopolitical competition intensifies and the world continues to move towards multipolarity, sanctions compliance risk must also evolve from a regulatory / compliance issue into a board-level strategic issue.