On Monday, the U.S. Department of Defense announced that it has added Tencent Holdings, the Chinese tech giant, and CATL, a major battery manufacturer, to its list of companies linked to China’s military, a move expected to heighten tensions between the U.S. and China.
Shares of Tencent, the parent company of WeChat, saw a 7.3% drop in Hong Kong on Tuesday, losing approximately HK$275 billion ($35.4 billion) in market value. CATL’s shares, traded in Shenzhen, fell by 2.8%, erasing 32.2 billion yuan ($4.4 billion).
Both companies swiftly responded, labeling the move as a "mistake." Tencent assured that its operations would remain unaffected and pledged to challenge the decision, possibly pursuing legal action. CATL, the world’s leading electric vehicle battery producer, also denied any involvement in military activities.
While the listing does not immediately impose sanctions, it could harm the companies' reputations and serve as a warning to U.S. firms about the risks of engaging with them. This development could also put pressure on the U.S. Treasury to impose additional sanctions.
The Defense Department’s annual update to the "Section 1260H" list, which tracks Chinese military-linked companies, named 134 entities, including semiconductor manufacturer Changxin Memory Technologies, wireless company Quectel, drone maker Autel Robotics, and COSCO Shipping Holdings, China’s largest shipping company. The Commercial Aircraft Corporation of China (COMAC), along with two units of the China National Offshore Oil Corporation (CNOOC), were also added.
Quectel, which denies military involvement, called the designation an error and requested reconsideration. COSCO’s shares dropped by over 4%, though the company did not provide immediate comments. The Chinese government called on the U.S. to lift its "illegal unilateral sanctions" and vowed to defend the rights of Chinese companies.
The list update is part of a broader strategy by the U.S. to address national security risks posed by Chinese companies, further straining relations between the two largest economies. Jefferies analysts noted that while the list reflects the Pentagon’s stance, it could influence other governmental actions.
Morningstar's Ivan Su noted that while Tencent could likely challenge its inclusion in U.S. courts, the move could damage its reputation. However, Tencent’s U.S. gaming revenue, which accounts for a small portion of its earnings, is unlikely to be significantly impacted in the short term.
China expert Craig Singleton argued that the additions to the list show the growing risks for American companies dealing with Chinese firms, as more sensitive technologies come under protection.
Other newly listed companies include MGI Tech, a maker of genomic sequencing tools, and Origincell Technology, which is alleged to operate a cell bank and bio-storage services. MGI declined to comment, and Origincell did not respond immediately.
U.S. lawmakers had advocated for adding certain companies, including CATL, to the list. Concerns have arisen around Ford’s partnership with CATL for a battery plant in Michigan, though Ford has not yet commented on the development.
Representative John Moolenaar expressed support for the inclusion of these companies on the list, emphasizing the importance of protecting U.S. security. Meanwhile, companies like DJI and Hesai Technologies, previously added to the list, have sued the Pentagon but remain under the designation.
The Pentagon also removed six companies from the list, stating that they no longer met the criteria, including AI firm Megvii Technology, China Railway Construction, China State Construction, and China Telecommunications Corp.