The Trump administration is considering adding tech giants Alibaba and Tencent to a blacklist of firms allegedly owned or controlled by the Chinese military, two people familiar with the matter said - a move that could inflame tensions with Beijing days before US President-elect Joe Biden takes office.
Defense Department officials, who oversee the designations, have not yet finalized plans to add the companies and are also discussing adding other Chinese firms, the sources said, speaking on condition of anonymity because the deliberations are private.
If added, Alibaba and Tencent would be subject to an executive order signed by US President Donald Trump in November, which bans US investors from buying shares of the blacklisted firms starting in November, 2021.
Tencent declined to comment and Alibaba did not immediately respond to requests for comment. The discussions were first reported by the Wall Street Journal.
Shares in Alibaba Group Holding Ltd were down 5% in morning trade on the Hong Kong Stock Exchange. Tencent Holdings Ltd shares were down 3%. Alibaba's US-listed shares closed down just over 5% on the news on Wednesday.
Trump has unleashed a raft of tough measures against Chinese firms in his waning days in the White House as he seeks to cement his hardline legacy and as Beijing and Washington have clashed over the coronavirus and the Chinese crackdown on Hong Kong.
On Tuesday, US President Donald Trump signed an executive order banning transactions with eight Chinese software applications, including Ant Group's Alipay mobile payment app and Tencent Holdings Ltd's QQ Wallet and WeChat Pay.
But some investors expressed skepticism that the Tencent and Alibaba would come under long-term US ownership restrictions.
"These are private companies that are widely owned, predominantly by US and global investors," said Brendan Ahern, Chief Investment Officer of Krane Funds Advisors.
The November executive order sought to give teeth to a 1999 law that tasked the Defense Department with drafting a list of Chinese companies deemed to be owned or controlled by the Chinese military.
The Pentagon, which only complied with the mandate last year, has so far blacklisted 35 firms, including China's top chipmaker SMIC and oil giant CNOOC.
While release of the November directive prompted index providers like MSCI to begin deleting blacklisted companies from their indexes, confusion about the scope of the rules prompted some dramatic flip-flops by the New York Stock Exchange in recent days.
The NYSE originally on December 31 announced plans to delist China Mobile Ltd, China Telecom Corp Ltd and China Unicom Hong Kong Ltd. On Monday, it did a U-turn after consulting with regulators in connection with the US Treasury's Office of Foreign Assets Control and decided to keep them listed. On Wednesday it said it will return to the original plan.
S&P Dow Jones Indices have followed the NYSE and said late on Wednesday it will remove the American Depositary Receipts (ADRs) of these three telecom companies.