China Halts Loans to US-Sanctioned Refiners, Exposing Limits of Financial Decoupling
Beijing's directive to freeze yuan credit for Iranian oil importers reveals the structural tension between sanctions defiance and dollar-system dependence.
China’s National Financial Regulatory Administration quietly ordered the country’s largest state banks to suspend new yuan-denominated loans to five US-sanctioned refiners in early May, contradicting a public directive from the Ministry of Commerce that told firms to ignore American sanctions.
The conflicting messages expose Beijing’s strategic bind. While China invoked its blocking statute on May 2 — the first time it has deployed the 2021 law with a concrete prohibition order — its financial regulator simultaneously instructed Industrial & Commercial Bank of China, Agricultural Bank of China, China Construction Bank, and Bank of China to halt new financing for the sanctioned entities, according to Bloomberg. The directive, issued before May 1, targets five refiners sanctioned by the US Treasury on April 24: Hengli Petrochemical, Shandong Jincheng Petrochemical Group, Hebei Xinhai Chemical Group, Shouguang Luqing Petrochemical, and Shandong Shengxing Chemical.
The US sanctioned these refiners for processing Iranian crude after the February 28 escalation in US-Iran tensions. China imported more than 80% of Iran’s oil exports in 2025, with teapot refineries accounting for a quarter of Chinese refining capacity, per Al Jazeera. The Strait of Hormuz closure has driven Brent crude to $103/barrel in March, spiking to nearly $128/barrel on April 2.
The Dual-Message Strategy
Beijing’s Commerce Ministry blocking order explicitly prohibits Chinese entities from complying with US Sanctions it deems extraterritorial overreach. Geopolitechs reported the May 2 invocation marks the first operational use of China’s Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation since the law took effect in January 2021. Yet the NFRA’s private directive to banks reveals operational caution. State-owned lenders risk secondary sanctions if they process transactions for designated entities — a threat US Treasury Secretary Scott Bessent reinforced in April, warning Chinese institutions against facilitating Iranian trade.
Hengli Petrochemical disclosed in April it sought 235 billion Yuan ($34.4 billion) in total Banking credit for its operations this year, according to Fortune. That credit line is now frozen for new disbursements, forcing the refiner to either rely on existing facilities or seek alternative financing outside the state banking system.
Alternative Settlement Infrastructure Accelerates
The credit freeze is driving sanctioned refiners and their suppliers toward yuan-denominated settlement pathways. China’s Cross-Border Interbank Payment System handled an average 920.45 billion yuan in daily transactions in March 2026, a 48.5% jump from February’s 619.74 billion yuan, with record daily volumes exceeding 1.22 trillion yuan, per Disruption Banking. The surge coincides with India settling Iranian oil purchases in yuan through ICICI Bank’s Shanghai branch in April, bypassing dollar-based correspondent banking.
Iran has begun charging yuan-denominated transit tolls for vessels passing the Strait of Hormuz, while BRICS nations advance the mBridge multi-currency settlement platform — backed by China, the UAE, Thailand, and Hong Kong — to reduce reliance on SWIFT infrastructure, according to the Atlantic Council. These moves create parallel financial rails for commodity trade, though their scale remains a fraction of dollar-denominated flows.
“The refineries primarily work with Chinese banks that have not yet been directly sanctioned. If the US extends secondary sanctions to those institutions, or major state-owned entities, Beijing would likely respond with more forceful countermeasures.”
— Dominic Chiu, analyst
Energy Market Implications
The financing halt compounds supply disruptions already roiling global markets. Global crude supply fell 10.1 million barrels per day to 97 mb/d in March, while refining throughput dropped 6 mb/d in April to 77.2 mb/d as feedstock constraints deepened, the International Energy Agency reported. Chinese teapot refiners, which process a quarter of the country’s crude, now face both reduced crude access and constrained working capital.
The credit squeeze forces refiners into higher-cost short-term financing or barter arrangements, raising operational costs that flow through to refined product prices. With China’s refining sector already operating under margin pressure from elevated crude costs, the banking directive adds a liquidity constraint that could accelerate consolidation among smaller independent refiners.
Structural Limits of Weaponized Finance
The contradiction between public defiance and private compliance reveals Beijing’s unwillingness to fully decouple its banking system from dollar rails. Chinese state banks hold significant dollar-denominated assets and rely on correspondent banking relationships with US institutions for international trade settlement. Exclusion from the dollar system would impose costs far exceeding the value of Iranian oil financing, creating a structural ceiling on China’s sanctions countermeasures.
Cui Fan, a professor and former Commerce Ministry advisor, told Fortune the sanctions “disrupt the stability of China’s energy supply chain and jeopardize China’s energy security,” framing credit denial as a defensive necessity. Yet the dual-track approach — public resistance paired with quiet bank compliance — suggests Beijing views preserving dollar-system access as more critical than protecting sanctioned refiners.
- State bank credit freeze forces sanctioned refiners toward yuan settlement or non-bank financing, accelerating bifurcation of oil trade finance.
- CIPS transaction volumes up nearly 50% as alternative settlement infrastructure scales, though still dwarfed by SWIFT flows.
- Beijing’s dual messaging exposes limits: blocking statute invoked for political signaling, but banks comply to avoid dollar-system exclusion.
- Energy market already stressed by supply disruptions now faces financing constraints that could accelerate refiner consolidation.
What to Watch
The Trump-Xi summit scheduled for May 14-15 in Beijing will test whether the credit freeze represents a temporary tactical move or a permanent restructuring of oil trade finance. US extension of secondary sanctions to major Chinese state banks would force Beijing into a binary choice: accept dollar-system exclusion or abandon support for Iranian trade. Watch for signals on whether the NFRA directive expands to existing loans or remains limited to new financing. CIPS transaction data for April and May will indicate whether yuan settlement acceleration is sustained or temporary. Finally, monitor whether sanctioned refiners can maintain operations through non-bank yuan credit or are forced into asset sales, which would reveal the practical limits of China’s alternative finance infrastructure.