The U.S. Treasury Department on Friday imposed sanctions against one of China’s “teapot refineries,” run by a company called Hengli Petrochemical in the port city of Dalian, for buying Iranian oil.

“China-based independent teapot refineries continue to play a vital role in sustaining Iran’s oil economy, and Hengli is one of Iran’s largest customers for crude oil and other petroleum products, having purchased billions of dollars’ worth of Iranian petroleum,” said the Treasury Department’s Office of Foreign Assets Control (OFAC).

“Additionally, OFAC is targeting approximately 40 shipping firms and vessels that operate as part of Iran’s shadow fleet, whose transportation of petroleum and petrochemicals provides a financial lifeline to Iran’s unstable regime,” the statement continued.

Treasury Secretary Scott Bessent said the sanctions were part of Operation Economic Fury, his department’s effort to impose a “financial stranglehold on the Iranian regime, hampering its aggression in the Middle East, and helping to curtail its nuclear ambitions.”

“At President Trump’s direction, Treasury will continue to constrict the network of vessels, intermediaries, and buyers Iran relies on to move its oil to global markets,” he said.

“Any person or vessel facilitating these flows — through covert trade and finance — risks exposure to U.S. sanctions,” Bessent warned.

“Teapot” refineries are small independent oil refineries in China that depend heavily on discounted purchases of sanctioned oil from suppliers like Iran, Russia, and Venezuela. When the teapots lost access to Venezuelan oil after the fall of dictator Nicolas Maduro, they pivoted to buying even more from Iran.

The Treasury Department noted that China’s independent refineries purchase the majority of Iran’s oil exports, and Hengli “has emerged as one of Tehran’s most valued customers.”

“Since at least 2023, Hengli has received Iranian crude oil shipments overseen by the oil sales arm of Iran’s Armed Forces General Staff, Sepehr Energy Jahan Nama Pars Company, generating hundreds of millions of dollars in revenue for the Iranian military,” the Treasury statement noted.

Hengli’s facility in Dalian is one of the biggest independent refineries in China, with a production capacity of about 400,000 barrels per day. Hengli has been buying large quantities of Iranian oil since 2023 and has grown into one of China’s most important petrochemical firms, including plastics and industrial chemicals.

Carrying this Iranian oil to China’s refineries is a vast “shadow fleet” of illicit tankers. OFAC sanctioned 19 specific vessels on Friday, along with the shipping companies that employ them.

Industry analysts told Bloomberg News on Monday that the latest Treasury sanctions were a significant escalation against China’s voracious energy industry, imposed against China’s biggest independent refiner just weeks before President Donald Trump is scheduled to meet with dictator Xi Jinping.

Some analysts thought the sanctions could be a “bargaining chip” that Trump could be prepared to deal away in talks with Xi, while others saw Friday’s action as a mark of how serious the Trump administration is about choking off Iran’s oil money.

“With Hengli out of the dollar-based payment system, hundreds of chemical, synthetic fiber and textile producers across East Asia face near-immediate disruption to vital supplies — potentially good news for competitors in China, Japan and South Korea, but a change that will lead to further inflationary pressures from an eight-week war in the Middle East,” Bloomberg cautioned.

Hengli shares plummeted by ten percent on Monday as news of the Treasury sanctions spread. The Chinese Foreign Ministry angrily denounced the “illicit unilateral sanctions that have no basis in international law.”

“We urge the U.S. to stop willfully slapping sanctions and using long-arm jurisdiction. China will firmly defend the lawful rights and interests of Chinese companies,” said Chinese Foreign Ministry spokesman Lin Jian.