Birds fly near the Pentagon building over the U.S. Air Force Memorial, Dec. 22, 2024 in Arlington, Va., U.S. AFP-Yonhap

The U.S. government's move to add Tencent Holdings, China's most valuable company, to its list of Chinese military firms has raised concerns about further bifurcation in the technology spheres of the world's two largest economies.

Tencent, operator of super-app WeChat and the world's biggest video gaming business by revenue, is among five new companies that Washington believes pose a threat to U.S. national security, according to a document on the Federal Register published on Tuesday.

The Shenzhen-based social media giant said its inclusion on the Pentagon's list was "clearly a mistake", as the company is "not a military company or supplier."

"Unlike sanctions or export controls, this listing has no impact on our business," Tencent said in a statement on Tuesday. "We will nonetheless work with the Department of Defense to address any misunderstanding."

The latest U.S. move shook investor confidence in some of China's biggest private tech companies ahead of the inauguration of president-elect Donald Trump this month.

Tencent shares slumped 7.3 percent to HK$379.60 in Hong Kong on Tuesday. CATL, the world's biggest maker of electric-vehicle batteries and which was also newly blacklisted, fell 2.8 percent to 249.45 yuan in Shenzhen.

While the addition of Tencent to the U.S. blacklist was a "negative surprise", it does not incur specific sanctions or penalties, according to Ivan Su, senior equity analyst at Morningstar. It is also likely that the company can reverse the decision through legal actions, he added.

"Given Tencent's business model — which primarily revolves around social networking and online gaming — we believe the company has a good chance to secure exclusion through U.S. courts," Su wrote in a research note. "However, inclusion in the list may result in reputational damage and could discourage other companies from collaborating with Tencent and its subsidiaries."

In a filing to the Hong Kong stock exchange on Tuesday, Tencent said it "intends to initiate a reconsideration process to correct this mistake" and "undertake legal proceedings" to remove the company from the list if necessary.

A man walks outside CATL's battery cell production facility code-named "Z-base" in Ningde, Fujian province, China, Nov. 8, 2024. Reuters-Yonhap

There are precedents for the removal of Chinese companies from the Pentagon's list. In 2021, smartphone giant Xiaomi reached an agreement with the U.S. government to overturn a blacklisting by the Trump administration.

The Pentagon also removed from its latest list six companies it said no longer met the requirements for the designation, including artificial intelligence (AI) firm Megvii.

However, Tencent faces the risk of broader sanctions if U.S.-China relations continue to deteriorate, according to Alex Capri, a lecturer at the National University of Singapore's Business School and author of Techno-Nationalism: How it's Reshaping Trade, Geopolitics and Society. That could send ripples through the global supply chain, he said.

"Washington has widened the techno-nationalist grey zone for an entire ecosystem of Chinese and non-Chinese companies that use Tencent for everything from cloud infrastructure and cloud computing, to data center services," Capri said.

"These creeping export controls signal that the tech war between China and the U.S. is escalating, and there is every indication that when it comes to strategic technologies like telecoms, or, in the case of CATL, batteries for [electric vehicles], global value chains will continue to bifurcate and fragment."

The popular video game "Fortnite" by Epic Games is pictured on a screen in this picture illustration, Aug. 14, 2020. Reuters-Yonhap

Tencent, once known for "owning half the rivers and mountains" in China's internet industry, operates across a wide range of businesses covering social media, online gaming, fintech, cloud computing, AI and more.

It also has a sprawling global investment portfolio, with stakes in U.S. social media platforms Reddit and Snap, as well as game studios including League of Legends developer Riot Games and Fortnite creator Epic Games.

Tencent's earnings exposure in the U.S. is estimated to be in the high-single-digit percentage range, stemming primarily from video gaming revenue, according to Morningstar's Su. The company's video gaming revenue in the U.S. is unlikely to be affected in the near term, he added.

While the Pentagon designation has no legal ramifications, it may give the U.S. Treasury an excuse to impose further sanctions and trade restrictions, and may make it harder for Tencent to buy advanced products from U.S. tech giants such as chip-designing company Nvidia, said Zhou Chao, researcher at Beijing-based think tank Anbound.

This is not the first time that Tencent has become a target of U.S. scrutiny.

In 2020, the Trump administration attempted to ban WeChat in the U.S. citing national security reasons. That order was revoked in 2021 by President Joe Biden.

Read the full story at SCMP.