China Opposes Pentagon's Inclusion of Alibaba, Baidu, NIO on Military List; US-Listed Chinese Stocks Under Pressure

China's Ministry of Commerce recently issued a statement strongly opposing the U.S. Department of Defense's decision to add several top Chinese companies, including Alibaba, Baidu, and NIO, to its so-called "Chinese military companies" list. This move is seen as another escalation of Washington's tech crackdown on China, sparking widespread concern in the U.S. stock market over the Chinese stock sector. Analysts note that while the list does not directly trigger sanctions, it may heighten investor worries about compliance risks for the affected companies and impact their business dealings with U.S. partners.

Background: Pentagon List Expands Again

According to the U.S. Department of Defense's official website, the latest update to the "Chinese military companies" list includes several well-known firms such as Alibaba, Baidu, and NIO. The list is established under Section 1260H of the U.S. National Defense Authorization Act for Fiscal Year 2021, aiming to identify so-called "Chinese military companies operating directly or indirectly in the United States." While being placed on the list does not automatically trigger sanctions, it restricts the U.S. Department of Defense from procurement cooperation with these companies and may draw attention from other regulatory bodies.

A spokesperson for China's Ministry of Commerce responded, stating that the U.S. action is "completely unfounded," seriously disrupts international economic and trade order, and harms the legitimate rights and interests of enterprises. China will take necessary measures to resolutely safeguard the legitimate rights and interests of Chinese companies. Alibaba, Baidu, and NIO have also issued statements denying any ties to the military and emphasizing their efforts to seek removal from the list.

Market Impact: Short-Term Pressure on Chinese Stocks, Long-Term Logic Unchanged

Following the announcement, US-listed Chinese stocks generally experienced volatility. Alibaba, Baidu, and NIO saw notable declines in after-hours trading, but the overall market reaction was relatively restrained. Analysts believe that investors had already anticipated friction in the China-U.S. tech sector, and the list's limited legal effect prevented widespread panic.

From a fundamental perspective, Alibaba and Baidu remain strong in areas like cloud computing and artificial intelligence. Alibaba's Q3 2024 earnings report showed its Cloud Intelligence Group revenue grew 7% year-over-year, while Baidu's intelligent cloud business also maintained double-digit growth. NIO set a delivery record in 2024, surpassing 160,000 vehicles for the year. The core businesses of these companies have not been materially impacted by the listing event.

However, short-term uncertainty may still weigh on valuations of Chinese stocks. Some institutional investors may temporarily reduce positions due to compliance considerations. Additionally, if the U.S. Treasury's Office of Foreign Assets Control (OFAC) later links the list to sanctions, risks could amplify. But for now, such a scenario is considered unlikely.

Industry Perspective: Risks and Opportunities in Tech Decoupling

This incident is a microcosm of the deepening tech competition between China and the U.S. From Huawei and SMIC to Alibaba and Baidu, the scope of U.S. restrictions on Chinese tech companies continues to expand. This "list-based" strategy aims to sever ties between Chinese firms and the U.S. tech ecosystem, but it also accelerates China's independent innovation process.

For U.S. stock investors, the risk premium for Chinese stocks is rising. On one hand, geopolitical friction can trigger sharp stock price swings at any time; on the other hand, valuations of these companies are at historical lows, with some having P/E ratios lower than global peers. For example, Alibaba's current P/E ratio is around 10x, far below Amazon's 40x+. This valuation discount reflects market pricing of policy risks.

Notably, Chinese regulators have recently been sending stabilizing signals. The China Securities Regulatory Commission has repeatedly emphasized strengthening regulatory cooperation with the U.S. to resolve audit issues for Chinese stocks. Additionally, the People's Bank of China has cut reserve requirements and interest rates multiple times in 2024 to provide liquidity support for the real economy. These factors help alleviate concerns about systemic risks.

Investment Strategy: Cautious Observation, Focus on Fundamentals

In the current environment, investors should remain cautious and avoid blindly bottom-fishing. Key points to focus on include:

• Compliance Progress: Track whether affected companies successfully remove themselves from the list and whether the U.S. Congress introduces new restrictive legislation.
• Earnings Performance: Monitor upcoming quarterly reports from Alibaba, Baidu, NIO, and others to assess business resilience.
• Diversification: Avoid overconcentration in any single Chinese stock; consider using ETFs (e.g., KWEB) to spread risk.
• Long-Term Perspective: For investors bullish on China's long-term tech development, current valuation levels offer attractive entry points, but short-term volatility must be tolerated.

Overall, the Pentagon's listing event is another manifestation of U.S.-China tensions but is not a decisive factor. The core value of Chinese stocks lies in their vast domestic market and sustained innovation investment. As long as these fundamentals remain unchanged, short-term disruptions will eventually pass.