A poor start to the year for Chinese equities was compounded last week by a US decision to put two Chinese technology giants on a military blacklist, adding uncertainty to capital market transactions down the road.
The US Department of Defense on Monday added tech giant Tencent Holdings and electric vehicle battery maker Contemporary Amperex Technology, a major supplier to Tesla, to a blacklist for alleged links to China’s military.
The news came after Chinese markets had already stumbled into the new year, with stocks, bond yields and the renminbi all dipping on concerns over lingering economic weakness in China and the coming Trump tariffs.
Shares in Hong Kong-listed Tencent plunged 7.3% to HK$379.60 on Tuesday, while Shenzhen-listed CATL dropped 2.8% to Rmb249.45. Overall, Chinese stocks were down almost 4% year to date as of Thursday.
The blacklisting highlights the risk Chinese companies are facing amid escalating political tensions between China and the US, less than two weeks before president-elect Donald Trump takes office.
The power struggle has cast a shadow over China deal activity, which had seen signs of revival in the past few months after Beijing introduced a spate of economic stimulus measures.
“This is definitely not good news at the start of the year. Investors would wonder what more Trump will do to Chinese companies once he takes office,” said an ECM banker.
The blacklisting is particularly awkward for CATL, which is planning to list in Hong Kong in the first half of this year, subject to regulatory approvals, in a deal which could raise about US$5bn.
As the world’s top EV battery maker, CATL is expected to draw strong interest from global investors for its Hong Kong listing. But now some US funds may stay clear of the deal.
Whether US banks can work on the transaction is also in doubt. According to people with knowledge of the matter, CATL recently held a beauty contest following which China Securities International, CICC, Bank of America and JP Morgan were seen as frontrunners.
The blacklisting came as a blow to the US banks, which are now debating internally whether they can work on the transaction, said the people.
“It’s not a sanction list so in theory we can still work with them. No one would want to miss a US$5bn transaction,” said a person familiar with the situation.
“But the risk is we are not sure how the situation will evolve in the next few months. If the company gets added to the sanction list later, we will have to walk away from the transaction,” said the person.
CATL is also mulling the implications.
“They may want to add a European bank to play safe,” said another ECM banker.
Inclusion on the Pentagon's list does not carry broad economic consequences as it relates only to US defence procurement. The list, which currently contains 134 Chinese companies, could serve as a reference for other US government departments which may lead to possible future sanctions and restrictions including an investment ban.
Tencent and CATL derive around 90% and 70% of their revenues from China, respectively, according to a research note from CreditSights.
For its part, Tencent has no major deals planned in the short term. US banks “may hope Tencent will be removed from the list before the next deal comes,” said the second ECM banker.
'Clearly a mistake'
The Pentagon on Monday removed six companies it said no longer met the requirements for the designation, including AI firm Beijing Megvii Technology which was added to the list in January last year.
Tencent said in a statement that its inclusion was "clearly a mistake. We are not a military company or supplier. Unlike sanctions or export controls, this listing has no impact on our business."
CATL also blamed a mistake as the company has never engaged in any military-related business or activities. "It does not restrict CATL from conducting business with entities other than DoD and is expected to have no substantially adverse impact on our business," it said.
Both companies said they will work with the Pentagon to address any misunderstanding, and will take legal action if necessary.
Chinese chipmaker Changxin Memory Technologies, shipping firm Cosco Shipping and drone maker Autel Robotics were also added to the list on Monday.