The DoD said in an announcement on its website that the move was targeting “Communist Chinese military companies” operating directly or indirectly in the United States to “highlight and counter the People’s Republic of China’s (PRC) Military-Civil Fusion development strategy”. It did not provide further details on what kind of military ties each company has.

The same day, the Department of Commerce released its interim final rule on “Securing the Information and Communications Technology and Services (ICTS) Supply Chain,” which blocks US citizens from engaging in transactions in such sectors if the technology was made by, controlled by, or under the jurisdiction of a foreign country.

US adds nine Chinese firms, including Xiaomi, to military blacklist

Responding to the sanctions, Beijing-based Xiaomi published a statement on Friday, saying its products and services are used only for civilian or commercial purposes.

“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,” the statement said.

Analysts also were skeptical that the US had solid evidence that Xiaomi has military ties. “He who has a mind to beat his dog will easily find a stick,” said Linda Sui, director of smartphone research at Strategy Analytics.

She added that unlike Chinese 5G leader Huawei Technologies Co - which was added to Washington’s Entity List in May 2019, blocking it from acquiring US technology – Xiaomi only focuses on consumer products like smartphones and smart home devices.

However, it was uncertain whether the investment ban would be expanded to cover restrictions on the company’s supply chain, especially its chip supply.

“A very important factor is how the Sino-US relationship develops,” said Canalys vice-president of mobility Nicole Peng. “A lot of companies will have to operate under uncertainties in the future.”

Although the North American market accounted for less than 0.1 per cent of Xiaomi’s smartphone shipments in the first nine months of 2020, more than two thirds of its smartphones use semiconductors from US chip maker Qualcomm, according to IDC data.

“Huawei is an extreme case [in being blocked from buying US chips]”, said Peng. “But if there is a second company going through what Huawei experienced, that’s very scary. If Xiaomi were put on the Entity List, that means any other Chinese company can be put on the list at any time.”

What’s next for Beijing’s biggest chipmaking champion after US blacklisting?

The interim final rule did not name China specifically, but comes after state-controlled China National Offshore Oil Corporation (CNOOC) was added to the list. The DoC also cited the July 2020 indictment of two Chinese hackers suspected of working with China’s Ministry of State Security as an example of the potential risk of allowing unrestricted access to US ICTS supply chains.

The latest rule, among other stipulations, places restrictions on transactions involving internet communications software, which includes gaming applications, if they have more than 1 million US users. That stipulation could leave Tencent Holdings open to future legal troubles in the US since its best selling game titles and WeChat messaging app exceed that threshold in terms of US users.

Tencent directly owns game developers like Riot Games with massive user bases in the United States. According to esports tracking site OP.GG, more than 1.4 million people played Riot’s League of Legends (LoL) in the US in 2019.

Tencent-controlled Supercell’s latest hit game Brawl Stars had amassed 15.5 million downloads in the US as of last June, according to Sensor Tower, while Tencent-developed PUBG: Mobile had 46.2 million US downloads as of July and its Call of Duty Mobile had been downloaded 50 million in the US as of October, the data tracking company said.

“The text [of the interim final rule] seems contradictory and open to interpretation,” Vey-Sern Ling, senior analyst at Bloomberg Intelligence, told the Post. “It talks about software that is designed primarily for communications so one would think that messaging apps like WeChat would be more affected but at the same time it lists gaming applications below, which are not primarily designed for communications.”

“If we take reference from how the bans against WeChat and TikTok have been progressing … I doubt there is the political willpower to keep [American] kids from their LoL, Fortnite or Brawl Stars,” he said.

The Chinese Ministry of Foreign Affairs said the latest DoD move was another example of the US “hurting others without benefiting itself”, noting that the history of the US military-civilian integration policy can be traced back to before World War I. “The Trump administration has abused national power and has repeatedly suppressed Chinese enterprises for no reason,” ministry spokesman Zhao Lijian said on Friday.

Companies on the DoD blacklist will be subject to an executive order signed by the US President Donald Trump in November 2020, which forces US investors to divest their holdings in those companies by November 2021. New stock purchases of previously blacklisted Chinese companies have been banned starting January 11.

US investors made up 15 per cent of Xiaomi’s shareholders as of January 10, the third-largest group after Hong Kong, according to Bloomberg data. Among its biggest US shareholders are BlackRock, Vanguard Group and State Street Corp.

Xiaomi’s shares closed down 10.26 per cent in Hong Kong trading on Friday.

It is still unclear whether and how recent moves against Chinese tech companies will be enforced under the incoming Biden administration.

“In five days we have a different administration and so how they enforce (or remove) Trump executive orders like this and then go about China ties is still to be determined,” said Matthew Kanterman, research analyst at Bloomberg Intelligence. “It seems like Trump is just getting lots of stuff out in last few days while he can.”

Additional reporting by Che Pan