The US Department of Defense (DoD) has classified Tencent Holdings and other Chinese companies as "Chinese military companies operating in the United States." According to a federal register filing from the Office of the Under Secretary of Defense (OUSD) for Acquisition and Sustainment, the designation seeks to identify entities allegedly tied to or supporting the Chinese military. Although this designation does not directly impose sanctions, it discourages US firms from engaging with the listed companies, as noted by Bloomberg.
Tencent issued a statement calling the designation "clearly a mistake," emphasizing its non-military operations.
Under the William M. Thornberry National Defense Authorization Act for Fiscal Year 2021, the Deputy Secretary of Defense classified these firms as "Chinese military companies (CMC)." The law mandates annual updates to the list through 2030, targeting businesses suspected of ties to the Chinese military, according to Investing.com.
Tencent ADR plunge and responses from listed companies
The designation triggered a sharp market reaction, with Tencent's American Depositary Receipts (ADRs) plunging 7.8% to $49.01 (figures are accurate as of the time of publication and may be subject to change), their largest single-day decline in three months, as reported by Yahoo Finance and Reuters. Prosus NV, which owns a 25% stake in Tencent, also saw its shares drop by 9.21%.
The list also includes companies such as CATL, SenseTime, and Autel Robotics. CATL dismissed the classification, asserting it is a private company with no military ties and has been publicly listed since 2018. Autel Robotics, meanwhile, did not respond to BNN Bloomberg's request for comment.
Successful removal cases and Tencent's resilience amid headwinds
Although the DoD's list is largely symbolic, it poses reputational and commercial risks for listed companies. However, some Chinese firms have successfully secured removals. Xiaomi, for instance, was delisted in 2021 after negotiating with the US government. Likewise, Advanced Micro-Fabrication Equipment (AMEC) pursued legal action and was removed by the end of 2024.
Listed companies can request a reevaluation of their designation. Recently, six firms, including Beijing Megvii Technology, China Marine Information Electronics, China Railway Construction, China State Construction Group, China Telecommunications, and Shenzhen Consys Science & Technology, were delisted. This highlights the potential for removal through negotiation or legal action.
Despite these challenges, Tencent has shown resilience. In 2023, its Hong Kong-listed shares surged over 42%, supported by growth in gaming and financial technology. While domestic consumption in China slowed, Tencent outperformed many rivals, showcasing its ability to adapt to a challenging market.
Tencent's official response to inclusion on the Section 1260H list
Tencent's stock decline highlights concerns over the designation's impact on its US business operations. Being labeled a CMC poses reputational risks and raises the possibility of future sanctions or restrictions, as reported by HKET.
Tencent, in a January 7 statement to Yicai Global, called its inclusion on the list "clearly a mistake," clarifying that it is neither a military enterprise nor a supplier. The company stated that the designation does not affect its operations but pledged to work with US authorities to resolve the issue.
Analysts anticipate negotiations and short-term market volatility
While the DoD designation has placed near-term pressure on Tencent, analysts believe Tencent will seek a resolution through negotiations. Past cases of delisted firms offer optimism that legal or diplomatic efforts could yield similar results.
Market watchers predict the designation will dampen investor sentiment and cause short-term share price volatility. However, Tencent is expected to engage with the DoD to negotiate removal from the list.