The US Department of Defense has expanded its list of companies allegedly working with China’s military to include two major Chinese tech firms: social media and gaming giant Tencent and CATL, the world’s largest battery manufacturer. The move represents the latest development in the ongoing technological rivalry between the United States and China.

While inclusion on the Pentagon’s 1260H list does not result in immediate sanctions, it could impact the companies’ reputations and potentially hinder their commercial progress, particularly in the United States. The market response was immediate, with Tencent’s shares dropping 6.5% in Hong Kong and CATL’s Shenzhen-listed shares declining more than 3%.

The Defense Department describes the 1260H list, which is updated annually, as “an important continuing effort” to counter China’s military-civil fusion strategy. This strategy aims to develop the world’s most technologically advanced military by removing barriers between China’s civilian research, commercial sectors, and its armed forces.

Tencent has responded to its inclusion on the list, calling it “a mistake” in a statement to CNN. “We are not a military company or supplier. Unlike sanctions or export controls, this listing has no impact on our business. We will nonetheless work with the Department of Defense to address any misunderstanding,” a company spokesperson stated. CATL, which supplies batteries to Tesla and plans to provide its “knowledge” and services to Ford for a lithium-ion battery plant in Michigan, has been contacted for comment.

This development comes amid escalating tech tensions between Washington and Beijing ahead of President-elect Trump’s inauguration. Recently, Beijing announced plans to restrict the export of technology used to extract minerals critical for the global electric vehicle industry. In December, the outgoing Biden administration implemented new export controls on US-made semiconductors, aiming to prevent their use in China’s development of advanced weapons and artificial intelligence systems.

The military-civil fusion strategy has been a cornerstone of Chinese President Xi Jinping’s military modernization efforts since he came to power in late 2012. While the integration of military and civil sectors dates back to the 1990s, Xi elevated it to a national strategy in 2014 as part of his vision to transform China into an economic, technological, and military superpower.

Isaac Stone Fish, CEO and founder of Strategy Risks, a business intelligence firm focusing on China, notes that the People’s Liberation Army differs fundamentally from the US military due to its role as the armed wing of the Chinese Communist Party. “Beijing demands that its companies support the PLA,” he explained. “US companies that have important partnerships with large Chinese companies, like Ford with CATL, need to understand that the regulatory, economic, and PR risks of these partnerships will continue to grow.”

Morningstar senior equity analyst Ivan Su suggests that Tencent might successfully challenge its inclusion on the list through US courts, similar to Chinese consumer electronics maker Xiaomi’s 2021 case. Xiaomi successfully secured exclusion from a separate Defense Department list after a federal judge ruled that Washington lacked “substantial evidence” to support claims of the company’s military control.