US–China Tit-for-Tat Before Trump–Xi Meeting: Heavy Self-Damage Overshadows Gains

On September 19, 2025, during a phone call between Trump and Xi, Trump came away with a double win, while the CCP’s wolf warrior diplomacy was left deflated. (Image by People News)

[People News] On the evening of May 2, 2026, the Ministry of Commerce of the Communist Party of China unexpectedly announced a blocking order against US sanctions targeting Hengli Petrochemical (Dalian) Refining Co., Ltd. and four other Chinese private "teapot" refineries, based on the 2021 "Regulations on Blocking the Extraterritorial Application of Foreign Laws and Measures." The announcement clearly stated that domestic entities "must not recognise, must not implement, and must not comply" with the relevant measures of the US SDN list.

In mid-May, Trump and Xi Jinping were set to hold a summit in Beijing, which many observers viewed as a pre-arranged "exchange before the meeting" orchestrated by the Communist Party. The Chinese side appeared to adopt a strong stance, showcasing a tough response to the US's "long-arm jurisdiction" for the first time in a practical context. However, this was merely a typical asymmetric game of "injuring 800 of the enemy while self-inflicting 10,000," and frankly, it was yet another misstep by Xi Jinping.

The US SDN list represents a nuclear-level precision strike against China's vulnerabilities.

These US sanctions were not a sudden decision but rather a continuation of the Trump administration's maximum pressure policy on Iran. On April 24, the US Department of the Treasury's Office of Foreign Assets Control (OFAC) announced sanctions against five Chinese companies, including Hengli Petrochemical (Dalian) Refining Co., Ltd., Shandong Shouguang Luqing Petrochemical Co., Ltd., Shandong Jincheng Petrochemical Group Co., Ltd., Hebei Xinhai Chemical Group Co., Ltd., and Shandong Shengxing Chemical Co., Ltd., citing suspicions that these private enterprises had violated regulations in trading Iranian oil.

Hengli Petrochemical (Dalian) Refining Co., Ltd. is recognised as the second largest private refining company in China, having acquired billions of dollars' worth of Iranian oil, making it one of the largest customers of Iranian crude oil and other petroleum products. The U.S. Treasury Department has labelled Hengli as a 'teapot' refinery, a term used internationally to describe China's small and medium-sized private refining enterprises, which collectively account for approximately a quarter of the country's total refining capacity.

Five Chinese companies have been placed on the 'Specially Designated Nationals List' (SDN List), which enforces sanctions such as asset freezes and trade restrictions. The SDN List is a sanctions roster published and managed by the U.S. Office of Foreign Assets Control (OFAC), established in 1963, well before the Entity List introduced by the U.S. Department of Commerce's Bureau of Industry and Security in 1997. While the Entity List mainly restricts the export of U.S. technology and products, the SDN List has a wider scope and more stringent measures. It includes individuals, organisations, enterprises, and vessels involved in illegal activities such as terrorism or drug trafficking. Assets of those listed within U.S. jurisdiction will be frozen, and U.S. individuals and entities are prohibited from conducting transactions with them. Furthermore, secondary sanctions are even more severe; shareholders owning more than 50% of the listed entities will face secondary sanctions, and any bank that continues to provide U.S. dollar clearing services to them may incur substantial fines or even be barred from the U.S. dollar system.

These 'teapot' refineries serve as the primary channels for China to import inexpensive Iranian oil, providing a competitive edge for the domestic refining sector. The Chinese Communist Party (CCP) has long turned a blind eye to, and even encouraged, this grey trade to secure domestic energy supplies while showcasing its commitment to supporting Iran. This has become a systematic foundation for the CCP's proxy strategy in competing with the U.S. in the Middle East.

The CCP's Blocking Measures: A First Practical Test—Legal Shield or Empty Threat?

Since their introduction in 2021, China's 'Blocking Measures' have largely remained dormant. Their recent activation has been touted by officials as a significant step in safeguarding sovereignty. The measures mandate that entities within China must not comply with U.S. sanctions, effectively providing private companies with a boost of nationalist sentiment.

The CCP's objectives with this initiative are threefold: first, the ban offers legal protection for Chinese companies, encouraging them to continue operations and support Iran through state-owned banks, domestic markets, or non-U.S. dollar channels; second, it signals the CCP's firm stance on energy security and aims to promote more transactions that bypass the U.S. dollar; third, it enhances Xi Jinping's negotiating position ahead of the upcoming Xi-Trump meeting.

However, on the international front, the effectiveness of the CCP's actions is quite limited. They are only enforceable within China's legal framework, meaning they prevent teapot enterprises from yielding to U.S. pressure, which paradoxically increases the burden on these companies as they must navigate legal sanctions from both China and the U.S., leaving them in a state of uncertainty. Furthermore, the so-called blocking measures exert almost no influence over multinational banks, international logistics, and global supply chains.

European, Japanese, and Middle Eastern financial institutions continue to prioritise adherence to U.S. regulations to secure their position within the dollar system. The most probable outcome is a further tightening of international financing channels for the five refineries, an increase in insurance costs, and greater challenges in ship leasing. Domestically, state-owned banks are likely to adopt a more cautious approach to lending, concerned about potential future impacts from U.S. chain sanctions.

Self-inflicted losses of ten thousand: The private sector and real industries are under significant pressure.

The impact of this incident on the Chinese economy, governed by the Communist Party, is considerably more severe than any countermeasures that the United States might take. The teapot refineries symbolise the agile innovation of China's private economy in the energy sector, providing jobs and contributing to tax revenues. While a blocking order offers legal protection, it does not alter their precarious position in the international market. The effectiveness of secondary sanctions on the SDN list is notably strong, with the equity structure, supply chain partners, and indirect financing all potentially triggering a chain reaction of sanctions.

Given the current challenges facing the Chinese economy, including weak domestic demand, a severe downturn in real estate, high youth unemployment, and the accumulation of local debt risks, this incident undoubtedly exacerbates the situation. Increased energy import costs will elevate industrial production expenses, thereby squeezing profit margins in the manufacturing sector. If the Communist Party seeks to mitigate sanctions through the original barter method of trading oil for goods via Kunlun Bank, which is controlled by China National Petroleum Corporation, it may sustain the continuity of Sino-Iranian oil trade. However, this approach will also raise transaction costs, elevate international financing barriers, and limit the international trade opportunities for Chinese companies, all while facing the risk of intensified U.S. sanctions.

A closer look reveals that this action reflects the Chinese Communist Party's (CCP) misjudgment of global financial rules. The dominance of the US dollar is founded on mature markets, the rule of law, and a vast network. While China is promoting the Cross-Border Interbank Payment System (CIPS) and the internationalisation of the renminbi, these efforts are insufficient in the short term to pose a strategic threat, let alone serve as a replacement. The CCP's serious push for de-dollarisation in oil is essentially a farce, yet it is presented as a strategic victory, leading to higher costs for companies and pressure on the national economy.

On the eve of the summit, a desperate manoeuvre compresses negotiation space and escalates confrontation.

The CCP opted to publicly announce a blockade order just days before the Xi-Trump meeting, aiming to assert its bottom line and toughness, thereby attempting to gain leverage in negotiations. This wolf warrior-style approach, which involves being hard first and negotiating later, has repeatedly proven counterproductive in the past. Trump's transactional diplomacy emphasises the balance of power and domestic support, and this move by China will only reinforce the hardline consensus among US Congress members and allies, further tightening the connections between issues like Iran, trade deficits, and technological decoupling.

Xi Jinping appears to sense that the narrative of the East rising and the West declining is not gaining traction, and he seeks to enhance his standing by actively depleting his own strategic resources. The CCP's overreliance on unilateral legal measures and emotional counteractions, however, fails to alter the fundamental dynamics of the actual balance of power. Consequently, each 'countermeasure' accelerates the global supply chain's processes of 'de-risking' and 'de-CCP', with risks from foreign capital withdrawal, technological blockades, and financial isolation continuing to mount, which will also exacerbate the risks of technological decoupling and financial confrontation between China and the US.

(First published by People News) △