Two Regulations, One Direction: China’s Expanding Economic Security Playbook

On April 7, 2026, China’s State Council issued two new regulations strengthening its legal framework for supply chain security and countering “improper extraterritorial jurisdiction by foreign states.”¹ Together, the measures introduce more structured regulatory mechanisms with potential compliance and operational implications for multinational companies operating in or touching the China market.

Establishment of a Standalone Supply Chain Security Regime

Regulations on Industrial and Supply Chain Security (Decree No. 834) represent China’s first dedicated administrative regulation addressing industrial and supply chain security, which fills a longstanding gap in the country’s legal framework, according to the spokesman for China’s Ministry of Justice (MOJ). Structurally, Decree No. 834establishes an integrated framework built around three core mechanisms.

1. Key Sector List. Decree No. 834 provides for the formulation and dynamic adjustment of a key sector list. Sectors included on this list are subject to a set of systemic tools, including risk monitoring and early warning mechanisms (Article 9), material and production capacity reserve mechanisms (Article 10), and emergency response and intervention powers (Article 11). Although the scope of the list and specific industry coverage remain unclear pending official publication, existing policy signals suggest that sectors such as batteries, renewable energy, graphite, lithium, rare earths, and related technologies are likely to attract heightened regulatory sensitivity.²
2. Restrictions on Supply Chain Data Collection. Article 13 expressly subjects the collection of supply chain–related information within China to closer regulatory scrutiny. This would include activities such as supplier due diligence, audits, questionnaires, and on‑site, regardless of whether such supply chain data collection is initiated and conducted under Chinese laws or non-Chinese laws. However, it is important to note that this provision does not establish a standalone or new prohibition regime. Instead, it operates as a cross‑reference, tying supply chain information collection to China’s existing data security and national security regulatory framework. Accordingly, Decree No. 834does not prohibit legitimate due diligence or supply chain audit activities in and of themselves. Rather, it elevates the risk profile of such activities where they are conducted in violation of pre‑existing PRC laws.
3. Supply Chain Security Investigations and Countermeasures. Article 15 establishes a dedicated supply chain security investigation mechanism under which Chinese authorities may examine conduct affecting industrial or supply chain security and, based on the findings, impose corresponding countermeasures on foreign entities or individuals, including a prohibition or restriction on investment in China or China-related import and export privileges. This provision represents a specialized and refined application of China’s broader legal countermeasures framework in the supply chain context. It is aligned with Article 8 of the Regulations on Countering Improper Extraterritorial Jurisdiction by Foreign States promulgated on the same day. Drafted in broad terms, the provision creates a compliance risk that contract termination or transaction adjustments adopted to comply with unilateral non-Chinese sanctions or human rights regimes may trigger investigation or countermeasures.

Regulatory Measures to Counter Improper Extraterritorial Jurisdiction

Issued on the same day as Decree No. 834, Decree No. 835, the Regulations on Countering Improper Extraterritorial Jurisdiction by Foreign States, operationalize a structured mechanism for identifying, blocking, and responding to foreign improper extraterritorial measures. Decree No. 835 builds on pre‑existing statutory authorities, most notably the Anti-Foreign Sanctions Law (AFSL). Four key concepts form the core of China’s anti-extraterritorial jurisdiction framework.

1. Appropriate Connection. Article 4 expressly asserts China’s right to exercise extraterritorial jurisdiction over acts that have an “appropriate connection” with China, based on Chinese law, applicable international treaties, or the principle of reciprocity. The provision does not define what constitutes an “appropriate connection,” leaving the concept as an open‑ended jurisdictional standard.
2. Identification of Foreign Improper Extraterritorial Measures. A notable institutional development under Decree No. 835 is the formal designation of the MOJ as the lead authority for identifying foreign improper extraterritorial measures through an inter‑agency working mechanism. This represents a shift from the prior reliance on commerce‑focused implementations and underscores the framing of extraterritorial jurisdiction as a rule‑of‑law issue, rather than a purely trade concern. As of the date of publication of this article, no foreign measures have been formally identified under this mechanism. In addition, Article 13 introduces a tailored prohibition order mechanism that directly targets specific entities or individuals that implement or assist in implementing identified foreign improper extraterritorial measures.
3. Malicious Entity List. Decree No. 835 establishes a Malicious Entity List targeting foreign organizations and individuals that promote or participate in the implementation of improper extraterritorial measures. Listed parties may be subject to a broad range of countermeasures, including but not limited to entry bans, investment restrictions, transaction prohibitions, and asset freezes. Notably, Article 8 permits countermeasures to extend to entities that are controlled by a listed party, or that have been established or are operated with the participation of a listed party.
4. Reiteration of Private Right of Action. Article 14 reaffirms the right of Chinese entities and individuals harmed by improper extraterritorial measures to pursue civil claims against entities or individuals that implement or assist in implementing such measures. The provision reiterates Article 12 of the AFSL and reflects judicial practice already evidenced in a published 2024 case, in which a Chinese claimant recovered unpaid contractual sums after a non-Chinese counterparty suspended payment due to US sanctions compliance. The reiteration underscores China’s approach of complementing administrative countermeasures with private litigation as an enforcement tool.

Legal and Compliance Implications for Multinational Companies³

Following the issuance and immediate effect of this coordinated regulatory package, non-Chinese companies engaged with PRC counterparties, as well as multinational groups operating through China-based subsidiaries, face increasingly acute compliance dilemmas.

First, compliance with US sanctions or similar non-Chinese restrictive measures, including termination of transactions with Chinese counterparties, may expose companies to civil litigation in Chinese courts and the risk of designation on the Malicious Entity List. Conversely, continued dealings with sanctioned Chinese counterparties may trigger US enforcement action or secondary sanctions risks. Accordingly, multinational companies that instruct China‑based subsidiaries or personnel to cite non-Chinese sanctions or other politically sensitive grounds when terminating contracts with Chinese counterparties may find themselves targeted by Chinese enforcement that could be avoided by citing other business-related reasons for transactional decision‑making. The new regulations may lead Chinese subsidiaries to reassess contractual clauses designed to ensure compliance with non-Chinese measures and consider adopting more nuanced formulations that align with prevailing PRC regulatory expectations.

Second, with respect to pre-existing contractual arrangements, where genuine conflicts of law arise due to the designation of a Chinese counterparty, multinational companies may consider pursuing the statutory exemption or authorization mechanisms available under relevant legal regimes. These include seeking authorization to implement or assist in implementing certain foreign measures under Article 6 of Decree No. 835, or applying for a specific license from the US Office of Foreign Assets Control (OFAC), as appropriate. Early assessment and parallel engagement with relevant authorities may be critical to mitigating enforcement risk on both sides.

Third, supply chain due diligence has become a heightened risk area. Non-Chinese companies are increasingly required under non-China regulatory regimes to conduct supplier due diligence, including human rights and forced labor-related reviews. Decree No. 834 stresses, however, that investigative and information‑collection activities conducted in China must comply with existing PRC laws and may attract closer scrutiny. The applicable framework is anchored primarily in the Personal Information Protection Law, the Data Security Law, the Cybersecurity Law, the Counter‑Espionage Law, and related implementing rules. In practice, this heightened regulatory sensitivity may lead Chinese suppliers to adopt a more cautious posture and, in some cases, a reduced willingness to cooperate with non-Chinese companies’ due diligence.

Nevertheless, multinational companies retain room to structure due diligence in a compliant manner. A risk‑based approach is advisable: ESG‑focused diligence aligned with broadly accepted international standards generally presents lower risk. Due diligence conducted in accordance with multilateral frameworks to which China is a party is more likely to be acceptable.

Footnotes

1. These PRC regulations generally do not apply in the Hong Kong Special Administrative Region unless specifically implemented.

2. This is inferred from China's recent export control and law enforcement trends targeting these sectors. See https://www.mofcom.gov.cn/zwgk/zcfb/art/2025/art_79646f0161564975a938fe00fee158d5.html (MOFCOM and General Administration of Customs of China (GACC) Announcement No. 58 of 2025 on the Imposition of Export Controls on Certain Items Related to Lithium Batteries and Artificial Graphite Anode Materials); see https://www.mofcom.gov.cn/zwgk/zcfb/art/2025/art_6cb42957741440c6984de696b70df9ae.html (MOFCOM Announcement No. 62 of 2025 on the Imposition of Export Controls on Certain Rare Earth Related Technologies); see also https://www.peopleapp.com/rmharticle/30051795792 (report by the Ministry of State Security relating to a rare earth enterprise espionage case involving the unlawful transfer of sensitive data and information overseas).

3. Steptoe does not provide legal advice on the laws of the PRC. This section summarizes research from publicly available sources and is provided for informational purposes only.

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