Shares of Chinese tech behemoth Tencent Holdings dropped nearly 8% in Hong Kong trading after the U.S. Department of Defense (DoD) designated the company as a “Chinese military company.” This sharp decline follows a similar 8% fall in Tencent’s U.S. depository receipts in overnight trading on Wall Street.
U.S. Military Designation Sparks Market Reaction
The DoD’s decision has placed Tencent, along with other Chinese companies such as battery maker CATL, on a list of entities identified as linked to China’s military. The designation has significant implications for these companies, as the National Defense Authorization Act of 2024 prohibits the DoD from procuring goods or services from companies on the list, directly starting in June 2026 and indirectly from June 2027.
While the designation does not impose immediate sanctions or export restrictions, it has rattled investor confidence. Shares of CATL also saw a decline, dropping as much as 5.6% before recovering slightly to close 2.8% lower in Shenzhen.
Tencent and CATL Push Back
In response to the designation, Tencent released a statement calling its inclusion on the list a “mistake.” The company clarified that it is neither a military company nor a supplier to the military. Tencent emphasized that the listing “has no impact on our business” and appears to be based on inaccurate assumptions about its operations, which primarily involve social networking and online gaming.
Similarly, CATL also defended its position, stating that it is “not engaged in any military-related activities.” The company raised concerns about potential harm to its reputation and business dealings, particularly in the U.S.
Analyst Predictions and Market Outlook
Despite the steep decline in Tencent’s share price, analysts at Morningstar remain optimistic about the company’s long-term prospects. Ivan Su, a senior equity analyst at Morningstar, argued that Tencent’s business model and operations make it well-positioned to challenge the designation in U.S. courts. Su also pegged the fair value of Tencent shares at HK$704, representing a potential upside of over 86% from the current price of HK$378.2.
On the other hand, Vincent Su, another Morningstar analyst, noted that CATL’s inclusion on the list might discourage U.S. customers from purchasing its energy storage system (ESS) batteries in the future. This could potentially impact its role in the supply chain of major automakers like Ford and Tesla.
Broader U.S.-China Tensions
The designation of Tencent and CATL comes amidst ongoing U.S. efforts to curb China’s access to critical technologies. Over the past year, the U.S. has taken several steps to tighten controls on technology exports to China. For instance, in May 2024, it revoked certain licenses for selling chips to Huawei, and in September, it introduced sweeping export restrictions on technologies like quantum computing and semiconductors.
These actions are part of the U.S.’s broader strategy to address national security concerns and limit the transfer of advanced technologies to China, further straining relations between the two global superpowers.
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