China's new supply chain security and countering rules – key takeaways and compliance actions

The Provisions on Industrial and Supply Chain Security (State Council Decree No 834, the "Supply Chain Security Rules") and Provisions on Countering Improper Extraterritorial Jurisdiction (State Council Decree No 835, the "Countering Rules") were passed in March and took effect from 7 April 2026. These new rules closely align with the existing framework, including the Unreliable Entity List (2020) and the Anti-Foreign Sanctions Law (2021), and expand the toolkit for protecting Chinese industry and supply chains from foreign interference.

Supply chain security rules

Critical sectors list

The Supply Chain Security Rules mandate a list of critical sectors to ensure continuous production and circulation of goods, technology and raw materials in key industries. The list of critical sectors will be implemented and updated by relevant State Council departments. Critical sectors will be subject to enhanced information sharing, risk monitoring, risk prevention and emergency management.

We anticipate that specific industries such as semiconductors, high-end equipment, biomedicine, and critical minerals will be included on the critical sectors list. All enterprises throughout the entire chain of these industries, from raw material procurement to end-product distribution, will face stricter regulatory requirements, including reporting and cooperation obligations towards Chinese authorities. International companies operating in relevant industries can expect additional requirements from Chinese counterparties, for example with respect to information sharing. Companies sourcing from such sectors may face restrictions or the need for approvals from Chinese authorities in response to shortages or geopolitical developments.

Due diligence restrictions

Article 13 of the Supply Chain Security Rules bans unauthorised information gathering related to industrial and supply chains within China. Most multinational enterprises conduct supply chain traceability and due diligence activities in their daily operations based on foreign laws and compliance best practice. While such activities must comply with applicable regulation, including rules related to data protection and national security, the Supply Chain Security Rules do not impose any immediate additional restrictions.

Article 13 of the Supply Chain Security Rules is an additional legal basis for taking action against unlawful data gathering, but Chinese authorities have previously taken action against companies assisting foreign businesses with due diligence activities under existing legislation. One such example is the crackdown on American consulting companies in 2023 including Mintz Group, Capvision and Bain & Company. That said, certain sensitive due diligence activities, such as gathering information for the purpose of compliance with sanctions against Chinese companies, will likely fall within scope of activities restricted under Article 13 even if the data collection otherwise complies with for example data handling formalities.

Countermeasures

The Supply Chain Security Rules align with and extend the system of countermeasures under the Anti-Foreign Sanctions Law and its implementing rules. If a foreign country imposes discriminatory measures that may harm Chinese industrial and supply chain security, the relevant State Council departments may under Article 14 carry out investigations and put in place countermeasures such as import/export restrictions and fees. Such investigations and countermeasures may also be triggered under Article 15 in response to commercial activities of foreign organisations and individuals that could cause material harm to supply chains. For example, a multinational company that in compliance with its home country's laws or headquarters' directives, interrupts normal transactions with Chinese citizens or organisations may trigger a security investigation under the Supply Chain Security Rules.

If Chinese countermeasures are put in place, organisations and individuals within China are obligated to implement these, with no exception for business considerations or margin for discretion. Failure to adhere to countermeasures may result in strict penalties, including exclusion from government procurement tenders, import/export restrictions and prohibition from leaving or staying in China.

Multinational companies face the additional risk of dual illegality and the potential dilemma between complying with home country laws and violating Chinese law, in particular if geopolitical tensions result in tit-for-tat retaliations. Any decision of suspension or divestment from China triggered by foreign laws needs to be considered carefully and high-risk matters should be subject to Chinese legal opinions before any action is taken. If the termination of contracts with Chinese supply chain partners is made for business reasons, such as quality or price considerations, the grounds for termination should be documented in internal records to avoid being characterised as discriminatory under Chinese law.

Countering rules

Improper foreign measures

The Countering Rules Article 6 defines the factors relevant to identifying improper extraterritorial jurisdiction measures and implements a mechanism for the relevant State Council departments to investigate and counter such measures. When considering whether an extraterritorial jurisdiction measure is improper, factors such as conformity with international law, the connection with the implementing state and the risk of harm to Chinese citizens or organisations are relevant.

Once identified, a range of countermeasures are available in response under the Countering Rules Article 8. Organisations and individuals that assist in the implementation of improper measures may be put on a malicious entities list and countermeasures similar to those available under the Anti-Foreign Sanctions Law may be put in place against listed entities, including visa and travelling restrictions, freezing or seizure of assets, restrictions on business activities and fines.

Chinese authorities may also issue prohibition orders under Article 13, prohibiting compliance with improper extraterritorial jurisdiction measures. The first prohibition order under the Countering Rules was issued by the Ministry of Justice already on 15 May 2026, ordering Chinese entities not to assist the anti-subsidy investigation into Nuctech by the EU commission under the EU Foreign Subsidies Regulation, which it classified as an improper extraterritorial jurisdiction measure. A similar prohibition order was issued by MOFCOM on 2 May 2026 under Rules on Counteracting Unjustified Extra-Territorial Application of Foreign Legislation and Other Measures in response to US sanctions designations against five Chinese oil refineries, signalling a willingness from Chinese authorities to act in response to measures by foreign states.

Under Article 11, companies may petition for exemptions to conduct prohibited or restricted activities based on need. However, the threshold and circumstances that may be relevant for such exemptions are undefined and left to the discretion of the relevant State Council department.

Private right of action and extraterritorial jurisdiction

As with the Anti-Foreign Sanctions Law, Article 14 of the Countering Rules gives Chinese entities the right to sue for damages if they are harmed by any party implementing improper extraterritorial jurisdiction measures. The private right of action under the Anti-Foreign Sanctions Law was recently invoked by a Chinese company, a Chinese offshore engineering contractor, designated under US sanctions in a case against a European contractor withholding payment under an FPSO construction subcontract due to the US sanctions. Notwithstanding an arbitration clause in the underlying contract, Nanjing Maritime Court accepted jurisdiction and ultimately resolved the case through court mediation, after the defendant secured a licence from OFAC to provide security for the payment following arrest of their vessel by Nanjing Maritime Court.

Article 4 of the Countering Rules gives Chinese authorities jurisdiction over any act with an appropriate connection to China, even when occurring outside of Chinese territory. However, the term "appropriate connection" is undefined in the rules. If another state also claims jurisdiction, the Countering Rules leave the matter to be resolved diplomatically or by treaty.

Advice for companies

The Supply Chain Security Rules and the Countering Rules expand the Chinese legal framework of countermeasures, but do not fundamentally alter the obligations of foreign companies operating in China. The new rules also lack clarity and leave key terms undefined, and we expect more detailed implementing rules will be issued at a later stage. However, the direction of travel is clear, and geopolitical tensions may increasingly manifest in legal risks and potentially put businesses in a conflict of rules dilemma.

International companies with China operations should:

• Monitor the implementation of and updates to the critical sector list under the Supply Chain Security Rules and any implementing rules that provide more detailed guidance
• Analyse compliance programs and standard sanction clauses to account for a more robust Chinese compliance and blocking framework
• Screen Chinese business partners and supply chains to help manage the risk of rules conflict
• Assess Chinese law obligations before complying with foreign laws to identify consequences and options