Over the weekend, we reported that in what some called a “watershed moment”, Beijing ordered Chinese companies not to comply with US sanctions on five domestic refiners linked to the Iranian oil trade, deploying for the first time a blocking measure introduced in 2021 that was aimed at protecting its firms from foreign laws it deemed unjustified. Of note, China’s refiners – including Hengli Petrochemical (Dalian) Refinery which was sanctioned last month and several other privately-owned processors – had been facing asset freezes and transaction bans. Hengli was the most ambitious target to date in China’s refining sector, and underscores US eagerness to push Iran to the negotiating table at all costs, even just weeks before an expected and long-awaited meeting between Trump and his counterpart Xi Jinping. 

Well, maybe not. In an apparent reversal of its blocking measure orders, overnight Bloomberg reported that China’s financial regulator advised the country’s largest banks to temporarily suspend new loans to five refiners recently sanctioned by the US over their ties to Iranian oil.

The National Financial Regulatory Administration asked banks to review their exposure and business dealings with firms including the abovementioned Hengli Petrochemical (Dalian) Refinery, one of China’s largest private refiners, while awaiting further guidance. For now, banks have been guided not to extend new yuan-denominated credit, though they have also been told not to call in existing loans, Bloomberg’s sources said. 

The verbal directive, which came before China entered a long holiday weekend on May 1 and ahead of the upcoming Trump-Xi summit contrasts with a May 2 notice from China’s Ministry of Commerce, which instructed companies to disregard US sanctions. That was the first time China had deployed a blocking measure introduced in 2021 aimed at protecting its firms from foreign laws it deemed unjustified.

While China has often railed against unilateral sanctions, it has in past instances also quietly allowed its largest companies to comply with them, in order to avoid blowback on its own economy. Its largest state banks have a history of complying with US sanctions against Iran, North Korea, and even top officials in Hong Kong to avoid losing access to the US dollar clearing system. In earlier episodes, Beijing sought to shield its systemically important lenders by channeling Iran-related transactions through China National Petroleum Corp’s subsidiary Bank of Kunlun Co., which is currently sanctioned. 

As Bloomberg notes, the moves highlight the balancing act Beijing faces as it tries to project defiance toward the Trump administration while shielding its largest state-owned banks from US secondary sanctions. Tensions are escalating between the superpowers just weeks before a long-awaited meeting between President Donald Trump and his counterpart Xi Jinping in Beijing on May 14–15. 

Meanwhile, the White House has been ratcheting up efforts to cut off Iranian oil shipments to starve the Tehran regime for which oil remains the most vital financial lifeline. Late last month, the Treasury Department’s Office of Foreign Assets Control blacklisted Hengli, targeting a significant and well-connected player in the country’s vast crude-processing industry. The US also warned banks they are at risk of secondary sanctions if they support Chinese private refiners that buy Iranian oil.

Treasury Secretary Scott Bessent said the US sent letters to two Chinese banks warning them of the risk of secondary sanctions if they are found to be supporting transactions tied to Iran. Bessent didn’t identify the banks. 

Separately, but perhaps linked to this, China’s independent refiners have slowed purchases of Iranian crude as they seek to manage a government push to make fuel at any cost to ensure energy security while they face collapsing profit margins.

There are about 16 million barrels on ships anchored in the Yellow Sea off the Chinese coast, almost 40% higher than the level prior to a US blockade of Iran’s ports in mid-April, according to data from Kpler. Already razor-thin teapot margins plunged to record negative levels after the cordon began, while Iran’s oil prices have climbed since the war started, compounding the economic stress on independent refiners.

While the cost of Iranian crude is now fetching a slight premium to ICE Brent, compared with discounts prior to the war, China’s domestic fuel policy is also crimping refiners’ profits. Price hikes are often softened to help shield consumers, preventing processors from fully passing on rising costs. Above all, Chna’s “energy security” is the dominant theme, even if it means an entire industry has to suffer huge losses.

The smaller processors, known as teapots, have little choice but to keep making fuels such as diesel and gasoline. They have been told by Beijing to keep output at 2025 levels, even if they incur losses, or face cuts to their oil import quotas. Refining rates in Shandong province ramped up over April to the highest level in almost two years, even as processing margins sunk deeply into the red.

Chinese purchases of Iranian oil are expected to be above 1.4 million barrels a day this year, down from a March peak of 1.8 million barrels a day, according to Emma Li, lead China market analyst at Vortexa Ltd. “China’s demand for high-risk crude is unlikely to weaken materially,” she said. 

“I would not be surprised if the teapots are prioritizing politics over economics with an eye to their long-term survival,” said Erica Downs, a senior research scholar at Columbia University’s Center on Global Energy Policy. “They may be calculating that if they do their part to help China weather the energy crisis, then maybe they will build up some goodwill in Beijing.”

China’s teapots have a checkered history with government authorities. They have resisted efforts by Beijing to consolidate the industry in the past, but proved crucial for China’s fuel security in the 2000s. Iran also relies heavily on the smaller refiners, which buy most of the OPEC producer’s crude.

“In China, during special times like this, it becomes a political mission for private refiners to help secure fuel supplies,” said Liao Na, the founder of GL Consulting, which provides research on the Chinese refining industry.