GUANGZHOU, China — The Trump administration has added smartphone maker Xiaomi to a blacklist of alleged Chinese military companies.
Hong Kong-listed shares of the Chinese firm were down 10.6% at the open on Friday on that news.
Beijing-based Xiaomi was the world's third-largest smartphone maker in the third quarter of 2020, according to Counterpoint Research.
The move means that Xiaomi is now subject to a November executive order restricting American investors from buying shares or related securities of any companies designated by the Department of Defense to be a Chinese military company.
Trump's initial executive order was subsequently expanded to force investors to divest, or sell out, of affected holdings, by Nov. 11 this year.
The company is listed in Hong Kong and not in the U.S.
"The Department is determined to highlight and counter the People's Republic of China's (PRC) Military-Civil Fusion development strategy, which supports the modernization goals of the People's Liberation Army (PLA) by ensuring its access to advanced technologies and expertise acquired and developed by even those PRC companies, universities, and research programs that appear to be civilian entities," the DOD said in a statement.
Xiaomi is one of nine entities designated as "Communist Chinese military companies." Comac, a Chinese aircraft manufacturer, is also on the list.
Xiaomi denies military ties
Xiaomi hit back at the U.S. on Friday and said it is not linked to China's military.
"The Company reiterates that it provides products and services for civilian and commercial use. 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 NDAA," Xiaomi said.
For Xiaomi, everything is now on the line. By being blacklisted, it is now deemed a U.S. national security threat.Abishur PrakashCenter for Innovating the Future
NDDA refers to the National Defense Authorization Act of 1999, the legislation which the U.S. used to designate Xiaomi as a Chinese military company.
Xiaomi said it will "take appropriate course of actions to protect the interests of the Company and its shareholders."
The DOD released its initial list of companies in June 2020. Firms such as Chinese technology giant Huawei and semiconductor manufacturer SMIC, are also on the list.
"For Xiaomi, everything is now on the line," Abishur Prakash, a geopolitical specialist at the Center for Innovating the Future (CIF), a Toronto-based consulting firm, told CNBC by email.
"By being blacklisted, it is now deemed a U.S. national security threat. This may affect its global strategy, from expanding into markets like India to hiring Western talent to launching new products in Africa."
Trump's final push against China tech
The final days of Trump's presidency has seen the administration ramp up pressure on the Chinese technology sector.
On Thursday, the U.S. Commerce Department finalized rules that would prohibit certain transactions involving information and communications technology or services with countries Washington designates as a foreign adversary. China is on the list.
President Donald Trump has used executive orders to target Chinese apps and companies such as Tencent's WeChat.
The administration has also used a blacklist called the Entity List to restrict American companies exporting technology to Chinese firms. This has hit Huawei in particular and saw the company cut off from Google's Android mobile operating system, hurting its smartphone sales in markets outside of China.
Washington has also used export rules to cut Huawei off from key semiconductor supplies.
To be clear, Xiaomi has not been put on the Entity List. It's unclear at this point if the military designation by the U.S. will affect the phone maker's ability to buy key components like semiconductors. Xiaomi's smartphones rely on chips from American company Qualcomm.
"If Xiaomi is not on the Entity List yet and supplies continue unabated, then at least its operations can continue for now," Bryan Ma, vice president of devices research at IDC, said. "Still, this doesn't help its image, especially as it cozies up to more telcos and distributors around the world."