The U.S. Defense Department has added several prominent Chinese technology giants to its annual list of companies it claims have ties to China’s military, a move that could have serious implications for these firms’ international operations. Among the companies now included on the so-called “Section 1260H list” are major players such as Tencent Holdings, battery maker CATL, and shipping conglomerate COSCO Shipping Holdings. This designation highlights the growing tension between the U.S. and China, particularly in the realms of technology, security, and economic competition.

The updated list, released on Monday, adds 134 companies to the existing roster, underscoring the U.S. government’s ongoing concern over the potential military connections of Chinese firms. Besides the tech and manufacturing giants mentioned above, the list also includes drone maker Autel Robotics, chip maker Changxin Memory Technologies, and wireless communications provider Quectel, among others. Companies such as COSCO, owned by China’s state-run oil major China National Offshore Oil Corporation (CNOOC), have also been added.

This list has been a contentious point in U.S.-China relations for several years. While the inclusion of these companies does not automatically result in direct sanctions or restrictions, it is a sharp warning to U.S. firms about the risks of conducting business with entities connected to China’s military. The designation serves as a form of public scrutiny, with potential reputational damage for the companies involved, as well as creating pressure for future sanctions from the U.S. Treasury Department.

Implications for the Affected Companies

The stocks of several companies included in the updated list saw significant drops following the announcement. Tencent, one of China’s most valuable tech firms and the parent company of WeChat, saw its Hong Kong-listed shares fall by as much as 7%, while its U.S. shares dropped 8% in over-the-counter trading. Tencent issued a statement calling its inclusion a “mistake,” emphasizing that the company is not a military supplier and does not engage in any military-related activities.

Similarly, CATL, the world’s largest electric vehicle battery maker, whose Shenzhen-listed shares dropped more than 5%, expressed its dissatisfaction with the U.S. decision. The company argued that it is not involved in any activities related to China’s military. Quectel, a leader in wireless communications, also denied any military ties, with a spokesperson labeling the Pentagon’s designation as an error and seeking reconsideration.

The U.S. Defense Department’s move has added to the tension between the two superpowers, as the Chinese government strongly opposed the inclusion of these companies. The Chinese embassy in Washington issued a statement condemning the U.S. designation and urging the U.S. to correct its “discriminatory practices.” China’s government has made it clear that it will protect the rights and interests of its firms, a stance that is likely to intensify the already strained relationship between the U.S. and China.

Despite these protests, the Pentagon’s action reflects the U.S. government’s increasing concerns about the potential security risks posed by Chinese firms, particularly in sectors such as technology, communications, and transportation. These companies’ links to China’s military are part of the broader geopolitical contest between the two countries, with the U.S. seeking to limit China’s global influence and access to sensitive technologies.

The Growing Risk of U.S. Restrictions on Chinese Companies

The U.S. government’s move is not an isolated incident but rather part of a broader strategy to restrict China’s access to critical technologies. This marks the continuation of a series of actions that include trade restrictions, investment bans, and export controls aimed at curbing China’s technological rise, particularly in areas such as artificial intelligence, telecommunications, and semiconductors.

Morningstar senior equity analyst Ivan Su suggested that while Tencent has a strong chance of challenging the Pentagon’s decision in U.S. courts, much like Xiaomi did in 2021, the reputational damage could be irreversible. The U.S. market remains a key source of revenue for Chinese companies, especially in the tech sector. However, the risk of being associated with military activities or security threats could dissuade U.S. investors from engaging with these companies.

One of the more significant issues at play here is the pressure being placed on U.S. firms that conduct business with the affected Chinese companies. Many lawmakers have voiced concerns over firms like Ford Motor, which has plans to build a battery plant in Michigan in partnership with CATL. These collaborations have sparked fears about the security risks of Chinese involvement in U.S. critical infrastructure, particularly in the electric vehicle and energy sectors.

According to research by Jefferies, the U.S. Defense Department’s list of Chinese Military Companies (CMC) serves as a guide for other government departments. While the designation does not impose immediate sanctions, it can pave the way for additional restrictions, including potential investment bans. This possibility makes it crucial for U.S. companies to reassess their dealings with Chinese firms, as the threat of sanctions or public backlash could have significant financial and reputational consequences.

Broadening the Scope of U.S. Security Concerns

The U.S. Defense Department’s inclusion of new companies such as MGI Tech, which produces genomic sequencing instruments, and Origincell Technology, involved in bio-storage technologies, signals that the range of sensitive technologies under scrutiny is widening. These additions reflect growing concerns about the use of biotechnology and genomic data in potentially military applications, a reflection of the increasingly complex nature of modern security risks.

Furthermore, previous designations of companies like DJI and Hesai Technologies have also drawn legal challenges, although these companies remain on the list. The ongoing lawsuits indicate the mounting pressure faced by Chinese firms, as they attempt to navigate the legal and diplomatic fallout from their inclusion on the list. These legal challenges are likely to persist, as companies seek to protect their international operations and global market access.

The Political and Economic Fallout

The Biden administration’s actions against Chinese companies are likely to fuel further political and economic tensions. With U.S.-China relations already at a low point, particularly with respect to trade, human rights, and technology, these moves could serve to exacerbate the divide. The economic impact on Chinese companies could be significant, especially for those that rely on the U.S. market or U.S.-based investments. However, this strategy may also serve to push China towards greater self-reliance in technology and trade, ultimately reshaping global supply chains and technological development.

The recent additions to the U.S. military companies list underscore the intensifying competition between the U.S. and China, particularly in the fields of technology and innovation. As the geopolitical landscape evolves, both nations will continue to vie for technological dominance, and the U.S. will likely continue to implement strategies aimed at curbing China’s influence in key industries.

(Adapted from SCMP.com)