China Issues "Blocking Statute" in response to U.S. actions against Chinese entities

The Blocking Statute comes into effect immediately, though it will not have effect until companies report sanctions and the Chinese government determines such measures are "improper." Even though not clearly specified, the new rule appears to be one part of China’s approach to counter recently-imposed U.S. export controls and sanctions measures, including the recent designations on the U.S. Department of Commerce Entity List, the implementation of the Department of Commerce military end user and end use (MEU) rule, identification of certain Chinese entities as Special Designated Nationals (SDNs), and recent U.S. Presidential Executive Orders to ban certain transactions with certain Chinese software apps.

Major takeaways

Application scope 

Article two states the Blocking Statute will apply when the extraterritorial application of foreign laws and measures violate international law and basic principles of international relations, and improperly prohibit or restrict Chinese entities and persons from engaging in normal economic and trade activities with a person or entity from a third nation. Which foreign measures, including U.S. sanctions, investment restrictions, and export control rules, that can be targeted and will be targeted are not clear. 

Working group

To implement this Blocking Statute, the Chinese government will establish a working group composed of relevant central government departments. While MOFCOM will lead the working group, MOFCOM and the National Development and Reform Commission will handle specific matters, in conjunction with other relevant departments of the State Council.  

Considerations of improper extraterritorial application of foreign legislation

Improper extraterritorial application of foreign legislation is not defined in the Blocking Statute. Instead, the Blocking Statutes provides discretion to the working group to make determination regarding such improper applications. Both impacts on the international law and China's interests shall be assessed, including factors such as: (1) whether international law or the basic principles of international relations are violated; (2) potential impact on China's national sovereignty, security development interest; and (3) the legitimate rights and interests of the persons and entities of China. In addition to these listed factors, the authority also has a right to consider other factors that shall be taken into account when making an assessment and determination.

Reporting obligation and Prohibition Order 

Under the Blocking Statute, Chinese individuals or entities are required to report to the Ministry of Commerce within 30 days when their business with third-country entities are affected by the foreign laws and measures. The working group will assess the situation in accordance with the factors discussed above. The reporting process can be confidential if upon the request of the reporting party.  

If working group determines unjustified extra-territorial application of foreign legislation and other measures exist, the Ministry of Commerce will issue a Prohibition Order restricting the recognition, enforcement, or compliance with the foreign laws and measures at issue. 

Exemption of Prohibition Order and penalty 

While the Blocking Statute does not expressly provide for the scope of Prohibition Order, namely, whether the Prohibition Order would be only applicable to the reporting party, it does allow Chinese individuals and entities to apply for an exemption to the Prohibition Order. The competent authority will decide whether to grant an exemption to the applicant within 30 days upon a receipt of the application. 

This option would allow Chinese entities to assess and choose an approach that is in the best interests of its business. If a Chinese person or entity is subject to a Prohibition Order but does not apply for an exemption, and ultimately fails to comply with such Prohibition Order, the competent commerce department of the State Council may impose certain penalties, including a warning, order of rectification, and a fine according to the severity of the circumstances. Therefore, if a Chinese entity does not comply with the foreign laws and measures and is thereby exposed to significant risks to its legitimate rights and interests, such entity may consider applying for an exemption from the Prohibition Order. 

The penalties provided in Article 13 of the Blocking Statute could also apply where a Chinese person or entity fails to truthfully report sanctions to the working group. Based on this, the provision establishes harsh obligations on the Chinese individuals and entities because it indicates that reporting is mandatory and compliance with the Prohibition Order is also mandatory once issued, unless an exemption is granted by the Chinese authority. 

Compensation and legal proceedings 

Article nine of the Blocking Statute authorizes Chinese persons and entities to sue in Chinese courts for compensation of losses incurred from other parties' (including foreign companies located outside of China) compliance with the foreign laws and measures prohibited in the Prohibition Order and foreign rulings made in accordance with those foreign laws and measures. With this provision, the Blocking Statute may be enforceable through legal proceedings that are to be brought by Chinese parties who believe their interests have been damaged by someone else's compliance with the foreign legislation.

Government support and actions

Article 11 authorizes the Chinese government to provide financial support to Chinese persons and entities when they suffer severe losses in non-compliance of a sanction or measure. Articles 12 authorizes the PRC government to take necessary countermeasures based on actual circumstances and needs in response to the improper application of foreign laws, though does not specify what kind of countermeasures may be authorized.

Potential impact and recommendation 

The Blocking Statute establishes a legal foundation for the Chinese government to countermand foreign laws and measures that it determines to be improper or in violation of international law. However, this law remains ambiguous and further implementation guidance from the government is needed. Further guidance may include open questions such as whether any Prohibition Order would govern the entities in a third country, whether the entities in a third country are entitled to apply for an exemption to the Prohibition Order, or whether a compensation claim in a Chinese court can be made against the entities in a third country. 

Under the law, companies may be put in a situation where there will be a conflict between complying with a Chinese Prohibition Order or complying with a foreign sanctions measure or decision. Chinese companies (including foreign invested entities established and registered in China) should therefore consider their potential exposure to both the Blocking Statute and the applicable foreign laws, such as the Office of Foreign Asset Control (OFAC) sanctions regimes, export control laws, and other recent U.S. actions against Chinese persons. We recommend companies review and assess implications of this law and be prepared to act quickly once the reporting is triggered. Some of these considerations may include:

• Reviewing whether their activities are potentially subject to sanctions under the foreign laws and regulations.

• Analyze whether a Prohibition Order would provide relief for the company, and, if not, consider preparing an application for exemption from the Prohibition Order.

• Reviewing their supply chains for U.S. origin goods and products for exposure to U.S. export controls and sanctions restrictions.

• Reviewing their contractual obligations with their counterparties under the Blocking Statute and potentially relevant sanctions, including considering language regarding compliance with the Blocking Statute.

• Reviewing enforcement/reputational risks under the Blocking Statute and potentially relevant sanctions.

Foreign companies in a third nation but with significant business interests in China should vet these rules carefully and monitor implementation of the rules in China to be alert for any implications under this new framework. Note that the Blocking Statute may not apply to Hong Kong without further legislative action by the National People's Congress or the government of the Hong Kong Special Administrative Region.

We will continue to monitor these rules closely and provide updates as cases emerge. In the meantime, please do not hesitate to contact us should you have any questions on the application of the Blocking Statute or any potentially relevant sanctions. 

Authored by Roy Zou, Ben Kostrzewa, Stephanie Sun, and Keen Tang.