Source: Barron's Chinese

On January 6 local time, the USA Department of Defense added the Chinese Technology giant $TENCENT (00700.HK)$and Battery manufacturer $Contemporary Amperex Technology (300750.SZ)$ to the list of Chinese enterprises that the USA considers to be related to the Chinese Military.

Due to this news, $Contemporary Amperex Technology (300750.SZ)$ On Tuesday (January 7), it closed down nearly 3% at 249.45 yuan. $TENCENT (00700.HK)$ Hong Kong stocks closed down 7% at 379.60 Hong Kong dollars. $iShares MSCI China ETF (MCHI.US)$ On Tuesday, it closed down 0.83% at 45.24 US dollars.

With the USA viewing China as a strategic competitor and military threat, Contemporary Amperex Technology and TENCENT have previously faced scrutiny from the USA. In July 2023, the US Congress urged the Biden administration to investigate.$Ford Motor (F.US)$The plan to build a factory in Michigan with Contemporary Amperex Technology. Trump once tried to ban TENCENT's app WeChat during his first term.

Since 2021, the U.S. Department of Defense has released an annual so-called "List of Chinese Military Enterprises" as part of its efforts to emphasize and counter China's Civil-military Integration development strategy. Contemporary Amperex Technology and TENCENT are the latest Chinese companies added to this list.

Analysts point out that Chinese companies listed on this list will be prohibited from obtaining contracts from the U.S. Department of Defense, thus the latest actions by the U.S. Department of Defense have very limited impact on TENCENT, the giant in Social Media and gaming, and similarly minimal effect on Contemporary Amperex Technology, the world's largest electric vehicle Battery supplier (which also produces energy storage systems).

While placing Contemporary Amperex Technology and TENCENT on its list, the U.S. Department of Defense also notified the U.S. Department of Commerce and the U.S. Department of the Treasury, which have also established restriction lists. As the U.S. attempts to restrict China's access to critical technologies through export controls and investment restrictions by the Department of Commerce, the implications of being listed on the last two lists could become even more significant.

Contemporary Amperex Technology responded by stating, "The company has never engaged in any military-related Business or activities, and the U.S. Department of Defense's decision is indeed erroneous. We will actively communicate and clarify with the U.S. Department of Defense, including taking necessary legal actions."

TENCENT responded, saying, "Being listed on this list is obviously an error. We are neither a Military Industry enterprise nor a military supplier. Unlike export controls or others, this list does not affect our Business. Nonetheless, we will work with the relevant U.S. departments to resolve the misunderstanding."

According to Bloomberg, facing a drop in stock prices, TENCENT repurchased 3.93 million shares of Hong Kong stocks on Tuesday, marking the largest repurchase scale since April 2006.

Vey-Sern Ling, Managing Director of Union Bancaire Privee, commented, "It is evident from TENCENT's statement that the company believes the U.S. decision is erroneous and the stock price reaction is irrational, which may be the reason for the large-scale stock repurchase."

TENCENT is not the only buyer willing to intervene in the sell-off. On Tuesday, mainland Chinese investors bought TENCENT stocks worth 14 billion Hong Kong dollars through channels like "Hong Kong Stock Connect", making it the most bought stock of the day.

Smart Phone manufacturers $XIAOMI-W (01810.HK)$ Some Chinese companies, like XIAOMI-W, had previously been successfully removed from the list through lawsuits, as investors had sold their stocks out of concern at that time.

On the USA Department of Defense’s list, Contemporary Amperex Technology and TENCENT are the most favored Chinese companies by American investors, and they are closely tied to American firms, hence their inclusion on the list is more noteworthy than that of Chinese Military Industry companies. This also indicates that the USA's desire to "decouple" from China is an extremely complex matter.

Paul Triolo, a partner at consulting firm Albright Stonebridge Group, stated: "Including companies like Contemporary Amperex Technology in the list sets a very dangerous precedent, as many of Contemporary Amperex Technology's clients are in the Consumer sector, and their business spans globally in a critical industry."

Triolo believes that if this is the first step in including Chinese companies aimed at consumers in other restrictions by the USA, then the implications of their inclusion are significant. He also warned that considering these companies have no ties to the Chinese military, their inclusion could set a precedent where almost all other Chinese companies could be accused of having connections to the Chinese military.

Vivian Lin Thurston, a fund manager for Emerging Markets at William Blair, commented: "The USA lacks transparency regarding the reasons for including Chinese companies in the list and whether it means they will be sanctioned. This approach is akin to opening a Pandora's box; once included in the list, regardless of how good your fundamentals are, it will raise concerns among investors."

Philip Wool, the portfolio manager at Rayliant Advisors who holds Contemporary Amperex Technology stocks, said: "The inclusion of TENCENT and Contemporary Amperex Technology on the list by the US Department of Defense damages their reputation, and American companies may be unwilling to do business with Chinese companies on the list, but we believe this risk is very small."

Wool believes that putting TENCENT and Contemporary Amperex Technology on the list is conveying a message and will not directly impact their fundamentals. He also pointed out that if these two companies are included on other lists, their stock prices may be hit in the short term until domestic Chinese investors fill the gap left by American investors.

Wool stated that Contemporary Amperex Technology's business scale in the USA is relatively small, and in addition, American investors are already prepared for the risks arising from US-China relations. For Wool, the drop in stock prices presents a buying opportunity, but he also cautioned investors that as the new US government takes office and the details of its China policy become clearer, stock prices may experience volatility.

Editor/Rocky