Alibaba Pushes Back on U.S. Punishment as Stock Dips
China’s tech industry got a domestic AI boost despite fresh allegations of ties to China’s military for Alibaba, Baidu and BYD.
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China calls itself the “Middle Kingdom,” a term coined 3,000 years ago that captures a worldview placing itself at the nexus where Heaven and Earth meet. But the term appears appropriate today, given the heightened focus on the world’s second-largest economy.
Major Hong Kong-listed China plays such as Alibaba Group Holding (BABA) (HK:9988) are sinking on Tuesday after their inclusion on a new Pentagon list of businesses deemed “Chinese military companies.”
Taiwan, meanwhile, is reportedly considering tighter export controls on shipments of artificial intelligence (AI) chips into China. That is sending shares in chip-foundry market leader Taiwan Semiconductor Manufacturing Co. (TSM) (TW:2330) south in Wall Street trade.
China is keen to reduce its dependence on chips and tech from abroad. So it is thought to be prepping a C¥2 trillion ($295 billion) plan to support the buildout of data centers around the country.
Oh, and Chinese President Xi Jinping is returning on Tuesday from a two-day trip to North Korea, his first trip abroad this year, cementing relations with a neighbor nation that has, thanks to the war in Ukraine, drawn closer to Russia.
Got all that? Let’s drill down into the implications.
Pentagon Alleges Military Ties
Investors will immediately notice the impact of the new Pentagon list of companies with links to China’s military. You can find that list here. The Pentagon gives no evidence or proof to back its assertions.
Alibaba ended the Asian trade day down 1.4% as it found itself the headline act, determined to be a “military-civil fusion contributor” to China’s defense industrial base due to its alleged “affiliation” with China’s Ministry of Industry and Information Technology and the State-Owned Assets Supervision and Administration Commission (SASAC), which overseas state-owned enterprises.
Other new inclusions on the list include search-engine operator Baidu (BIDU) (HK:9888) as well as the electric-vehicle makers BYD (BYDDY) (HK:1211) and Nio (NIO) (HK:9866). Biotech contract researcher WuXi AppTec (HK:2359) is also added, as is unlisted robot maker Unitree. Nvidia (NVDA) said last week that it plans to work with Unitree to build robots.
It is always going to be hard to parse the relationship between a Chinese company and the Chinese government, given China’s command economy and extensive network of state-owned enterprises. The Pentagon “affiliation” doesn’t require any ownership stake or direct ties. So we could equally state that Microsoft (MSFT), for instance, is affiliated with the U.S. military-industrial complex if the Pentagon used Microsoft Word or Excel to prepare its new list.
Tencent, Alibaba Protest ‘Mistake’
You may recall that the entertainment empire Tencent Holdings (TCEHY) (HK:0700) and the world’s largest battery maker, CATL (HK:3750), which supplies Tesla (TSLA), found themselves on this same Pentagon list last year, a surprise development that I explained at the time.
Tencent, which runs the superapp WeChat, called its inclusion a “mistake,” as did CATL. But the shares sank nevertheless. It remains on the list, with the Pentagon saying it is “indirectly affiliated” with the Chinese army. CATL is “indirectly affiliated” with China’s tech ministry and “directly and indirectly” affiliated with the entity overseeing state-owned enterprises, the list states.
Alibaba says there is “no basis” for its inclusion, which it also calls a “mistake.”
“Alibaba is not a Chinese military company nor part of any military-civil fusion strategy,” it said in a statement. “The company will take all available legal action against attempts to misrepresent the company.”
List Put Up, Taken Down Before Trump Beijing Trip
BYD also opposes being added to the list and said it will take legal action to protect itself, while WuXi said it will also challenge the “incorrect” inclusion of the company.
It is possible for a company to get itself removed. The smartphone maker Xiaomi (XIACY) (HK:1810) was the first such company to pursue legal action to get itself taken off the list, efforts that succeeded in May 2021 after it was added earlier in the year.
The inclusion is bound to be political. The Pentagon in fact briefly posted an updated version of this list in February but quickly took it down, presumably waiting to repost it until after U.S. President Donald Trump had traveled to China, as he did in May.
China’s foreign ministry responded on Tuesday that the list is discriminatory and suppresses Chinese companies, urging Washington to “correct its mistaken practices.”
Inclusion on the Pentagon list has little direct fallout. The U.S. Defense Department will as of June 30 be prevented from contracting with companies on the list, and must cease buying their products or services via third parties as of next year.
It does not have the same impact as inclusion on the U.S. Commerce Department “entity list.” U.S. companies, individuals and investors are barred from dealing with companies on the “entity list” without express special permission. But the selldown of Alibaba stock on Tuesday indicates investors are concerned that the Pentagon list could flag further action by U.S. authorities against such companies.
Hong Kong Stocks Underperform This yYear
The 0.4% fall in the Hong Kong market was a severe underperformance, given that most Asian markets were up significantly on Tuesday after the tech rally on Wall Street the day before. Hong Kong’s market was, unusually, running counter to a rally in mainland Chinese stocks, where the CSI 300 gained 1.9%. Hong Kong stocks are now down 4.2% in 2026, whereas mainland markets are up 1.9%.
South Korea’s Kospi soared 8.2% to correct the “Black Monday” losses of 8.3% on Monday. It has been whipsaw action for stocks in Seoul, where retail investors have bought into a world-leading rally via 16 newly listed single-stock leveraged exchange-traded funds (ETFs).
The new ETFs, listed on May 27, are providing leveraged 2x exposure to stocks such as Samsung Electronics (KR:005930) and rival chipmaker SK Hynix (KR:000660). It is exacerbating the volatility of such stocks, with Hynix down 7.7% on Monday and up 15.9% on Tuesday.
Taiwan stocks ended Tuesday up 2.8% despite yesterday’s selloff in Taiwan Semiconductor Manufacturing Co. (TW:2330), which fell 5.5% in Asian trade on Monday. The world’s largest chip foundry stabilized today to end up a slim 0.4%.
But TSMC shares are down 1.8% on Tuesday in early trade on Wall Street, so we can expect renewed selling in Asia on Wednesday.
New Restrictions on Taiwan Tech?
The impetus is a Bloomberg report that the administration of Taiwan President Lai Ching-te is considering new rules to restrict the sale of any AI chip to all Chinese customers, not just companies that are on existing export blacklists.
Taiwan is negotiating on trade with the United States, and could suggest Taiwanese export curbs as a selling point for any deal. There are no current regulations in Taiwan to prevent the sale of tech into China, even though the United States has placed companies such as Huawei Technologies on the U.S. Commerce Department “entity list.”
Taiwan is reportedly considering adopting current U.S. policy to restrict the sale to Chinese buyers of AI chips above a certain processing power. Taiwan would likely also impose criminal penalties, given that its first known detention of alleged chip smugglers came last month based on the lesser crime of forging documentation.
The new rules would complicate life for the many Taiwan-based companies with operations inside China, in particular TSMC, which has wafer “fabs” in Nanjing and Shanghai. Those chip plants are currently allowed to receive the necessary equipment to fulfill existing orders but are restricted from adopting advanced technology in the future if that tech has U.S. ties.
Chinese Chipmakers Rally
Chinese chipmakers, the main beneficiaries of Beijing’s push to develop a homegrown chip industry, are rallying on Tuesday, given Beijing’s plans for a mammoth fund to support semiconductors and domestic data centers.
China’s largest contract chipmaker, SMIC (HK:0981), ended the day up 3.4% in Hong Kong trade, the top gainer in the Hang Seng Tech Index, which itself ended up just 0.3%.
The second-largest Chinese chip foundry, Hua Hong Grace Semiconductor (HK:1347), saw its shares climb 2.2. The company added the “Grace” to its name late last month as part of a push to cement its own corporate identity across Hong Kong and Shanghai listings, even though that reflects the 2011 acquisition of Grace Shanghai.
China is looking to deploy C¥2 trillion to build out data centers across the country, according to a draft blueprint that is reportedly in the works. State-backed telecoms such as China Mobile (HK:0941) and China Telecom (HK:0728) would operate the bulk of the data centers and ensure they’re connected, Bloomberg reports, with local suppliers providing at least 80% of the chips.
It’s noteworthy that SMIC, China Telecom and China Mobile were all originally listed in the United States, but have de-listed from Wall Street in the face of pressure from both Washington and Beijing. International investors can still access the stocks via Hong Kong.
Pressure to Close Loopholes
In conjunction with potential restrictions from Taiwan, U.S. senators Jim Banks, a Republican representing Indiana, and Andy Kim, a Democrat from New Jersey, on Monday wrote to the U.S. Bureau of Industry and Security pushing it to close any loopholes allowing the overseas operations of Chinese companies to buy advanced chips made with U.S. technology.
The Trump administration had chosen not to enforce rules put in place under the Biden administration that prevented Chinese access to U.S. chips. But Trump’s team belatedly moved last week to block orders of, for instance, Nvidia chips by the overseas subsidiaries of Chinese companies. The senators want to close off access even by non-Chinese companies that are effectively controlled by a Chinese company, even if the Chinese entity doesn’t own the overseas company placing the order.
China is also enjoying success selling its own tech abroad. Chinese exports leapt 19.4% year-on-year in May, fresh customs data show on Tuesday, above the 15% forecast. Data-processing equipment sales surged 66.1% year-on-year, with high-tech goods sales up 50.9% and auto exports up 39.0%.
At the time of publication, McMillan was long TSM and NVIDA.
