China's New Anti-Decoupling Rules: How Businesses Can Reduce Risk Without a Full Exit in 2026

China’s new supply chain security measures are changing how multinational companies approach diversification and market expansion. Amid increasing uncertainty, many organizations are choosing to pursue China+1 strategies, but abrupt exits are becoming increasingly complex “decoupling” from both an operational and compliance perspective. However, recent regulatory anti-decoupling developments in China suggest that reducing dependence on China may become significantly more complex than many organizations originally anticipated.

China’s New Supply Chain Security Rules Are Reshaping Global Expansion Strategies

For much of the past decade, rising labor costs, geopolitical tensions, pandemic-era supply chain disruptions, and growing opportunities elsewhere in Southeast Asia, India, the Middle East, and Europe have encouraged companies to explore alternative production and sourcing locations.

However, in an effort to limit or stop this flow of foreign investment, China has introduced the following key legislation.

Regulations on Industrial and Supply Chain Security (State Council Order No. 834)

In April 2026, China’s State Council introduced the Regulations on Industrial and Supply Chain Security (State Council Order No. 834), the country’s first comprehensive legal framework specifically focused on industrial and supply chain security. The regulations establish a national system for monitoring, investigating, and responding to activities that Chinese authorities believe could threaten the stability of critical supply chains. More than 15 government agencies are involved in the framework, creating a highly coordinated approach to supply chain oversight.

The regulations create several new considerations for foreign companies. Chinese authorities are now empowered to investigate foreign governments, organizations, companies, and individuals that adopt measures deemed to undermine China’s industrial or supply chain security. Importantly, the rules are not limited to government sanctions, and certain commercial decisions made by multinational corporations may also fall within the scope of review.

According to legal analyses of the regulations, authorities may scrutinize actions such as:

• Terminating supply relationships with Chinese customers or suppliers
• Relocating production capacity out of China where such moves significantly affect Chinese supply chains
• Implementing foreign sanctions, export controls, or trade restrictions that disrupt commercial relationships with Chinese entities
• Participating in supplier audits, due diligence programs, or data collection activities that authorities believe could expose sensitive industrial information
• Adopting policies that Chinese regulators interpret as discriminatory toward Chinese businesses or industries

The regulations also establish monitoring systems, early-warning mechanisms, emergency response procedures, and a dynamic list of strategically important industries.

Authorities are specifically tasked with assessing the security of supply channels for critical raw materials, technologies, equipment, and products that support China’s economic and national security objectives.

Regulations on Countering Foreign Improper Extraterritorial Jurisdiction (State Council Order No. 835)

At the same time, China introduced the Regulations on Countering Foreign Improper Extraterritorial Jurisdiction (State Council Order No. 835). Following proper investigation, these rules expand Beijing’s ability to respond to foreign sanctions, export controls, secondary sanctions, and other forms of what China considers extraterritorial enforcement by foreign governments.

Together with the Anti-Foreign Sanctions Law and existing Unreliable Entity List mechanisms, these measures create a more comprehensive legal framework for countering foreign economic pressure and reducing the chance of foreign companies in China to adapt to sanctions.

What China’s New Supply Chain Regulations Mean for Foreign Businesses

China’s latest supply chain security measures reflect a broader global trend toward economic security and industrial resilience. While the regulations themselves can have immediate and direct consequences that limit or prohibit companies that fall foul of them from doing business easily in China, the long-term consequences for investor confidence may be much more severe.

Put together, the new pieces of legislation signal a shift by authorities to clamp down on anything that they see as potentially threatening to local businesses or trends. While governments around the world are increasingly focused on protecting critical industries, reducing strategic vulnerabilities, and strengthening domestic supply chains, many foreign companies in China are now concerned that these regulations are anti-decoupling measures that could ban the exit of individuals, companies, or capital if deemed to be contrary to local advantage.

Why Companies Began Pursuing China+1 Strategies

These new regulatory environments are special in that they place greater emphasis on supply chain stability, strategic industries, technology protection, and economic security considerations in the “world’s factory”. For foreign businesses, this will undoubtedly mean that operational changes affecting production, sourcing, supplier relationships, or strategic assets may receive greater scrutiny than in previous years if the ability to react swiftly to market pressures or business needs cannot be guaranteed.

The concept of China+1 emerged long before the latest regulatory developments, but such changes are already adding to the acceleration of companies considering ways to secure their own supply chains and international operations.

Many organizations recognized that concentrating manufacturing, sourcing, customer support, engineering, or regional operations in a single country created unnecessary exposure. The COVID-19 pandemic highlighted this vulnerability when factory closures, transportation disruptions, and shifting public health restrictions affected supply chains worldwide.

At the same time, trade disputes, export controls, and changing geopolitical relationships increased uncertainty for businesses dependent on a single production location.

According to surveys conducted by major international business chambers and consulting firms over recent years, diversification has become a priority for companies across sectors including manufacturing, technology, electronics, pharmaceuticals, automotive production, consumer goods, and industrial equipment.

As a result, many employers are turning to gradual workforce diversification, using Employer of Record (EOR) solutions to establish teams in alternative markets without immediately creating new legal entities.

Rather than replacing China entirely, many businesses began developing parallel operations elsewhere. This strategy allows organizations to maintain access to Chinese suppliers, customers, and talent while creating additional capacity in alternative markets.

Why Abrupt Exits Can Create New Risks

When discussions about reducing China exposure first emerged, some organizations viewed relocation as a relatively straightforward process.

In reality, large-scale operational transitions are rarely simple.

Manufacturing facilities often rely on deeply integrated supplier networks developed over many years. Customer relationships may depend on local teams with specialized market knowledge. Technical expertise, quality control procedures, and operational experience are frequently concentrated within existing workforces.

It’s also important to note that these laws do not suggest that such anti-decoupling measures are unique to China. In recent years, similar trends can be seen in other major economies such as:

• the US CHIPS and Science Act of 2022 and subsequent outbound investment restrictions targeting advanced technologies in China
• the European Union adopted the Anti-Coercion Instrument (Regulation (EU) 2023/2675) to respond to foreign economic pressure against member states
• Japan’s Economic Security Promotion Act (2022) strengthens government oversight of critical supply chains, strategic technologies, and essential infrastructure

Although these measures differ in scope and intent, they reflect a broader global trend toward greater government involvement in supply chain security, strategic industries, and economic resilience, reducing the freedom companies once had to make purely commercial relocation and sourcing decisions.

Attempting to relocate capabilities too quickly can now create substantial potential challenges.

Organizations may face disruptions to production schedules, quality assurance processes, customer service operations, and procurement activities. They may also encounter employment law obligations, contractual requirements, data management concerns, and regulatory compliance issues.

For these reasons, many companies that once exclusively considered China for their expansion strategies are moving away from all-or-nothing and instead increasingly pursuing gradual diversification models designed to reduce concentration risk while preserving operational stability.

Why Workforce Diversification Is Often Easier Than Operational Relocation

Relocating physical operations can require significant investment of time and resources. New facilities, regulatory approvals, infrastructure development, supplier onboarding, and logistics arrangements often take years to implement successfully.

Building new teams, however, can often be accomplished much faster.

Many organizations are discovering that workforce diversification represents one of the most effective ways to reduce concentration risk while supporting future expansion.

• Engineering teams can be established in India
• Procurement specialists can be hired in Vietnam
• Regional sales operations can be launched in Singapore
• Customer support functions can be expanded in Malaysia

Today, workforce initiatives that make the most of modern working tools and remote models often require far less capital investment than full operational relocations while still providing meaningful strategic flexibility, meaning businesses can expand their global footprint without following the same pattern of opening or closing company entities according to traditional strategies.

How EOR Supports China+1 Expansion Without a Full Corporate Exit

Employer of Record (EOR) solutions have become increasingly seen as the most valuable tool for organizations pursuing gradual diversification strategies.

Under an EOR agreement, rather than establishing legal entities in multiple countries simultaneously, businesses can use an EOR to hire employees quickly and compliantly through an existing local infrastructure.

This approach allows employers to enter new markets faster while also reducing administrative complexity by allowing the EOR to take on key administrative roles in an unfamiliar local environment. An EOR simplifies compliance management by handling employment contracts, payroll administration, statutory benefits, tax withholding obligations, and local labor law requirements.

For organizations seeking to either test out the local market or reduce dependence on China, this creates a practical pathway toward diversification.

For example, instead of relocating entire departments to China immediately, businesses can build a team in-country without setting up a legal company entity. Alternatively, companies with a presence already established in China can investigate other markets, gradually transfer responsibilities without closing the door on China, and expand operations at a pace that aligns with commercial objectives (all while also taking advantage of new local benefits).

This phased approach often reduces operational disruption while creating greater flexibility for future decision-making.

Countries Benefiting From China+1 Workforce Expansion

Each of these destinations offers different advantages depending on industry requirements, workforce needs, and long-term expansion goals.

Why INS Global?

Since 2006, INS Global has helped companies hire, manage, and expand internationally across more than 160 countries. Our Employer of Record solutions allow organizations to build compliant teams quickly while reducing the complexity associated with global expansion.

As businesses adapt to evolving supply chain strategies and changing regulatory environments, flexibility and legal compliance have become more important than ever. Whether you are exploring a China+1 strategy, testing new markets, or building regional teams before establishing a local entity, INS Global can help you hire and operate compliantly while minimizing risk.

Employer of Record solutions provide one of the most effective ways to execute this strategy, allowing companies to expand internationally without the delays, costs, and commitments associated with immediate entity establishment.