China uses for the first time new rules to counter ‘improper’ foreign jurisdiction over its firms

SHENZHEN – A probe by the European Union into a Chinese security equipment firm has become the first target of Beijing’s new rules to protect its companies from perceived foreign overreach, as trade tensions between China and the bloc grow.

Nuctech, the partly state-owned maker of products such as baggage scanners for airports, is being investigated over concerns that Chinese government subsidies gave it an unfair advantage over other companies in the European market.

Beijing on May 15 barred “any organisation or individual” from assisting with the EU’s cross-border probe, which it said involved extensive and unnecessary requests to Chinese entities for information stored in China.

The EU’s investigation came under its Foreign Subsidies Regulation, which China has criticised as targeting Chinese companies and also saw European regulators conduct raids of Nuctech’s Dutch and Polish offices in 2024.

China’s move marks the first time it is using rules introduced in April 2026 to counter what it considers foreign countries’ “improper” extraterritorial jurisdiction – a government or court asserting its authority over entities for actions outside its physical borders – that could undermine its interests, or those of its companies and people.

It also came on the heels of Beijing’s May 2 order for its companies not to comply with US sanctions on five Chinese refineries accused of buying Iranian oil, which was also the first time it used another set of rules rolled out in 2021.

“This is sending a very clear message to the outside world – that China is going to actively enforce its legal toolkit against foreign overreach,” said Mr Kenneth Zhou, a partner at law firm JunHe.

It also puts multinational companies – including Chinese businesses with global operations – in a difficult position as they have to consider what to do when faced with competing legal demands, he said.

Ever since the first administration of US President Donald Trump from 2017 to 2021 began squeezing China on trade, Beijing has been formulating laws and regulations to shield its interests and companies from foreign economic pressures, and retaliate against these.

Some early moves were the introduction of an export control law and an “unreliable entity list” – a regulatory tool targeting foreign entities thought to have undermined China’s national security, sovereignty or economic interests – in 2020, as well as rules in 2021 to “block” external measures such as sanctions from being applied in China.

In the years since, Beijing has further bolstered its toolkit with measures such as an anti-foreign sanctions law. In March, new rules to safeguard supply chains, including from attempts to diversify production out of China, came into effect. And in April, Beijing introduced fresh regulations to counter unjustified “extraterritorial” jurisdiction.

Those running afoul of these rules could potentially face countermeasures such as expulsion from China, asset seizures and business restrictions.

China has built, “brick by brick”, a legal toolkit that has developed into a comprehensive framework over the years, said Mr Yu Zhiguo, a partner at Zhong Lun Law Firm in Beijing and a former Commerce Ministry official.

He cited, as examples, the two sets of rules China invoked in May.

The five-year-old blocking rules used against the US’ sanctions mainly affect how entities based in China behave and are narrowly scoped to blunt the effect of American sanctions on Chinese soil, he said. But the newer rules used against the EU are more expansive, applying also to foreign entities based in Europe, such as Nuctech’s counsel there, he added.

Of note is that the April 2026 rules also state China’s right to exercise extraterritorial jurisdiction of its own, over acts that have a “sufficient nexus” with China.

“What this says is: I too could do long-armed jurisdiction,” said Mr Yu, who posited that going forward, China could become more proactive in protecting the interests of its companies overseas.

Even as Beijing continues to mint new regulations, it is increasingly moving to use them as foreign pressures on its companies grow, complementing existing sources of leverage such as rare earth export controls.

“We are seeing a shift from a legislative framework to active enforcement, driven by the expanding scope of foreign investigations,” said Mr Todd Liao, a partner at law firm Morgan Lewis in Shanghai.

In the case of Nuctech, it was demands for extraterritorial data extraction – or “direct access to IT systems and executive e-mails hosted in Beijing” – that prompted China to act, he said.

This creates for companies a “structural compliance dilemma”, he added. Entities like foreign banks, auditors and international advisory firms operating in China now face “a direct legal collision between EU regulatory demands and China’s explicit prohibition”, he said.

Companies are now grappling with how best to navigate – or sidestep – future scenarios where legal obligations clash, observers say.

Beijing is now setting boundaries by showcasing how and when it will use its legal tools, said Mr Feng Chucheng, partner at consultancy Hutong Research in Beijing.

“The goal is to build and enhance regulatory deterrence on future actions by demonstrating Beijing’s ability and willingness to act when necessary,” he said.