Chinese smartphone vendor Xiaomi (HKSE:1810) dropped almost 10% in Hong Kong trading on Friday morning after the US Department of Defense put the company on its “Communist Chinese military companies” list on Thursday.
Along with Xiaomi, eight other companies, among them Gowin Semiconductor and Commercial Aircraft Corporation of China, are also new additions to the list, which bans US companies from investing in them. The defense department released an initial proposal to Congress in June 2020 in so-called efforts to counter China’s Military-Civil Fusion strategy and has been updating the list since then. It is different from the Entity List issued by the Department of Commerce, which is preventing Chinese companies from getting their hands on US technology and services, and includes Xiaomi’s rival Huawei.
In a statement on Friday, Xiaomi said that it is operating in compliance with the relevant laws and regulations of jurisdictions where it conducts its businesses. “The company confirms that it is not owned, controlled or affiliated with the Chinese military, and is not a ‘Communist Chinese Military Company’ defined under the National Defense Authorization Act,” it said.
“The primary immediate risk for Xiaomi is possible delisting from US exchanges and removal from any global indices,” commented Brock Silvers, CIO of Kaiyuan Capital. “The market evidently takes this risk seriously, as Xiaomi shares have plunged since the announcement.”
The move comes days before the the Trump administration is leaving office. On the other hand, the US government abandoned plans to add Alibaba, Baidu and Tencent to the military blacklist, Reuters reported on Thursday. “Xiaomi’s inclusion on the blacklist is already effective, and it seems unlikely that the Biden administration would move to reverse it,” said Silvers. “Both political parties in the US espouse tougher policies with regards to China, and the new administration would earn little political benefit from a reversal.”
Xiaomi shipped 46.6 million smartphones in the third quarter of last year, up 45.3% year-on-year, ranking as the third largest vendor globally, with a market share of 13.5%, according to market research firm Canalys. In the same quarter it reported RMB 72.2 billion (USD 11.2 billion) in revenue, representing an increase of 34.5% YoY, and made RMB 4.1 billion in adjusted net profit, an increase of 18.9% YoY.
(The article has been updated with the company statement and analyst comments.)