Shares of Tencent (TCEHY +0.44%), the Chinese tech giant and owner of the WeChat superapp, were tumbling Monday after the U.S. Department of Defense listed the company as a Chinese military entity in a Federal Register filing.
Such a move could carry significant implications for Tencent on trade, technology, and intellectual property, so it's not surprising that its stock fell in the wake of that news. As of 1:36 p.m. ET, Tencent shares were down 9.7% for the session.
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Tencent could be the latest victim in the tech cold war
There aren't direct consequences to being included on the "entity list," but with tensions flaring between the U.S. and China, U.S.-based companies may feel inhibited about doing business with Tencent and others listed.
The list of companies backed by the Chinese military was created under the Thornberry Authorization Act, which followed an executive order issued in late 2020 by then-President Trump that prohibits U.S. entities from investing in such companies.
In response, Tencent said: "We are not a military company or supplier. Unlike sanctions or export controls, this listing has no impact on our business." It also said the designation was "clearly a mistake," and that it plans to work with the Department of Defense to get itself removed from the entity list.
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What's next for Tencent
The sell-off that followed Tencent's inclusion on the entity list underscores yet another risk for Chinese tech companies. Even as China's struggling domestic economy has battered its stocks, Chinese companies also face headwinds as the U.S. government increasingly restricts chip and high-tech exports and takes other steps to hamper innovation in China.
Citigroup has described the slide in Tencent's stock price as an enhanced buying opportunity. The tech company remains dominant in China, though its growth has slowed from the pre-pandemic era.
Given the ongoing economic malaise in China, continued caution regarding Tencent's stock seems warranted.
