China pushes back against sanctions

Bloomberg News

China continued its pushback against U.S. sanctions, issuing new rules to protect its firms from “unjustified” foreign laws and allowing Chinese courts to punish global companies for complying with foreign restrictions.

The rules on “counteracting unjustified extra-territorial application” of foreign laws allow Chinese authorities to issue orders saying that companies or people in China don’t need to comply with foreign restrictions, the Ministry of Commerce said in a statement Saturday.

The measures went into effect immediately, and although they don’t mention the U.S. directly, China has long complained about the extra-territorial application of U.S. law through sanctions and restrictions on trade. The rules also allow Chinese citizens or companies to sue for compensation in Chinese courts if their interests are damaged by the application of foreign laws, and could put global companies in legal jeopardy in China for complying with U.S. sanctions.

“The new order will be enforceable in China primarily through court actions brought by parties who believe they’ve been damaged by someone else’s compliance with a foreign sanction,” Nicholas Turner, a lawyer at Steptoe & Johnson LLP in Hong Kong who specializes in economic sanctions, said Saturday.

“Companies with significant business interests in China may need to tread carefully to avoid being subject to claims by counterparties in China under prohibition orders issued pursuant to this new framework,” he said. Still, it remains to be seen whether it “will be effective at discouraging companies from complying with U.S. sanctions in the region or elsewhere.”

Forcing a Decoupling

The Chinese move comes as the outgoing U.S. President Donald Trump extends his campaign against Chinese companies in his final days in office, further straining ties between the world’s two largest economies.

“The release of new regulations ahead of the inauguration of the Biden administration served the purpose of drawing China’s red line in protecting Chinese companies’ interests and rights,” Tommy Xie, an economist at Oversea Chinese Banking Corp. in Singapore, wrote in a note Monday.

Throughout the Trump administration, the U.S. has imposed a series of legal restrictions on Chinese business. These include restricting the sale of U.S. technology to Huawei Technologies Co. and other firms, requiring investors to pull out of companies linked to China’s military and blacklisting firms for connection to alleged human rights violations.

Earlier this month, the U.S. banned transactions with Chinese apps like Ant Group Co.’s Alipay and Tencent Holdings Ltd.’s digital wallets, in addition to an ongoing effort to force the sale of TikTok by ByteDance Ltd. The New York Stock Exchange has also become involved, heeding calls from the Trump administration to delist certain Chinese companies.

China initially responded to these efforts by announcing what it calls an “unreliable entity list,” which aims to punish firms, organizations or individuals that damage national security, but it hasn’t said if anyone is on that list. These new rules will add to that as-yet unused toolkit.

Beijing also repeatedly pressured Canada to release Meng Wanzhou, daughter of Huawei billionaire founder Ren Zhengfei, after she was detained by Canadian authorities over a year ago at the request of the U.S. government on suspicion of violating U.S. sanctions on Iran.

Foreign Rulings

A new working mechanism involving the commerce ministry and the top planning agency will assess relevant cases and any decisions will be based on considerations like whether international law has been violated and the potential impact on China’s sovereignty and the “legitimate rights” of Chinese entities, according to the statement.

China isn’t unique in using such measures, as similar legislation is in place in the European Union and countries like Canada and Mexico, Han Liyu, a law professor at the Renmin University of China, argued in a separate statement released by the ministry.

The finance sector will be among those most affected by the new rules, according to Steptoe’s Turner.

“The order could have the effect of causing financial institutions in China to process more transactions involving sanctioned entities than before,” he said. “That doesn’t mean they would be breaching U.S. sanctions, as long as their activities are not subject to U.S. jurisdiction.”

People wearing protective masks as they watch the flag-raising ceremony at Tiananmen Square to mark the 71st Anniversary of the Founding of the People's Republic of China on Oct. 1, 2020 in Beijing, China. The country is about to plan out its 14th five-year plan which is expected to center around technological innovation, economic self reliance and a cleaner environment.