China's New Counter-Extraterritoriality Decrees: What Investors and Deal Teams Need to Know

By: Peter Pang

In early April 2026, China's State Council issued two regulations in quick succession with no grace period and immediate effect. Decree No. 834, the Regulations on the Security of Industrial and Supply Chains, took effect on March 31. Decree No. 835, the Regulations on Countering Foreign Improper Extraterritorial Jurisdiction, followed on April 13. Together, they represent the most significant expansion of China's legal toolkit for responding to foreign sanctions and export control regimes since the Anti-Foreign Sanctions Law was enacted in 2021.

From Defense to Offense

China's approach to foreign sanctions has evolved considerably since 2020. The Unreliable Entity List, the MOFCOM Blocking Rules, and the Anti-Foreign Sanctions Law all represented reactive instruments designed to deter or respond to specific foreign measures. Decree 835 is different in kind: Article 4 asserts China's right to exercise jurisdiction over conduct with an "appropriate connection" (适当联系) to China, even when that conduct occurs entirely offshore.

The phrase "appropriate connection" is undefined. It gives Chinese authorities broad discretion to determine when offshore decisions fall within their regulatory reach. For deal teams and portfolio companies, this means that decisions made outside China, about Chinese entities or supply chains, can now trigger a Chinese regulatory response. A board-level decision in New York or London to exit a Chinese supplier could, depending on circumstances, attract scrutiny under Decree 835.

The Malicious Entity List

Decree 835 introduces a new designation mechanism called the Malicious Entity List (恶意实体清单), targeting those who "promote or participate in implementing" foreign measures that China deems improperly extraterritorial. Without implementing guidance, how broadly "promote" will be interpreted remains an open question. Prior instruments required some form of direct implementation before sanctions exposure arose, and until enforcement practice develops, the outer boundary of this provision is difficult to assess with confidence.

The decree also introduces piercing rules: countermeasures can extend to entities "actually controlled by or participating in establishing or operating" a listed entity. For investors with complex holding structures that include Chinese operating companies, this creates a dimension of exposure that did not exist under prior instruments.

Supply Chain Diligence Under Decree 834

Decree 834 targets the information-gathering side of cross-border compliance. Article 13 restricts investigations and information collection activities related to industrial and supply chains where those activities violate Chinese law. For companies subject to EU or US supply chain diligence requirements, this creates a potential compliance tension worth examining carefully. The EU Corporate Sustainability Due Diligence Directive and the US Uyghur Forced Labor Prevention Act both impose affirmative diligence obligations, and how those interact with Article 13 in practice will depend on the specific activities involved and how Chinese authorities apply the provision.

The enforcement standard is also lower than prior instruments. Decree 834 allows investigations to be opened based on conduct that "poses a threat of causing actual damage," rather than damage that has already occurred. Chinese authorities do not need to wait for a harm to materialize before acting.

Personal Liability

Decree 835 also raises personal risk in a way earlier instruments did not. The decree references potential criminal liability for individuals who violate its provisions, going further than the administrative penalties and exit bans that characterized prior enforcement. For senior executives of portfolio companies or deal teams with a regular presence in China, the decisions they make, and where they make them, now carry greater individual consequence.

What to Do Now

Four areas warrant immediate attention.

Review pending contract terminations and supplier exits. Termination decisions affecting Chinese entities are the most visible trigger for enforcement under Decree 835. If any are planned or in progress, the rationale, documentation, and communication strategy should be assessed against the new framework before proceeding.

Revisit supply chain audit protocols. If your portfolio companies conduct ESG or forced labor audits involving Chinese operations, the scope of activities covered by Decree 834 and their interaction with Chinese law should be reviewed. Audit programs designed for prior compliance environments may need to be updated.

Reassess holding structures. The piercing provisions in Decree 835 create exposure for multinational structures that share control or operational connections with entities operating in China. A review of how Chinese operating companies sit within broader group structures is worth conducting before the next deal or refinancing.

Map executive exposure. For individuals who travel to China regularly or hold positions with Chinese entities, the criminal liability provisions of Decree 835 and the exit ban history under the AFSL make a personal risk assessment sensible, particularly for any executive involved in decisions that touch Chinese supply chains or counterparty relationships.

The Broader Pattern

These decrees did not appear in isolation. They follow the 2025 AFSL Implementation Regulations, the first judicial application of the Anti-Foreign Sanctions Law in the Nanjing Maritime Court, and a year of increasingly active enforcement by Chinese regulators across multiple sectors. China has been developing a more comprehensive legal framework for managing cross-border commercial and regulatory risk, and the April 2026 decrees are its clearest expression yet. Foreign investors operating in or with China are now navigating a jurisdiction with formal legal mechanisms that can respond to a wide range of compliance decisions made under foreign sanctions law.

The framework is more sophisticated than most deal teams currently treat it. That gap is worth closing.

References

Morgan Lewis & Bockius LLP. (2026, April 15). China issues new regulations on countering foreign extraterritorial jurisdiction: What MNCs need to know. https://www.morganlewis.com/pubs/2026/04/china-issues-new-regulations-on-countering-foreign-extraterritorial-jurisdiction-what-mncs-need-to-know

State Council of the People's Republic of China. (2026, March 31). Regulations on the Security of Industrial and Supply Chains (Decree No. 834).

State Council of the People's Republic of China. (2026, April 13). Regulations on Countering Foreign Improper Extraterritorial Jurisdiction (Decree No. 835).