Updated: January 15, 2021 10:44:43 am
Xiaomi Corp plunged 11 percent after the Trump Administration blacklisted China’s Number 2 smartphone maker and 10 other companies, broadening efforts to undercut the expansion of the country’s technology sector.
The US has targeted scores of Chinese companies for the stated purpose of protecting national security, but going after Xiaomi was unexpected. The Beijing-based company has been viewed as China’s answer to Apple Inc, producing sleek smartphones that draw loyal fans with each new release. The company, which vies with Huawei Technologies Co for the title of China’s No 1 mobile device brand, also makes electric scooters, earphones and smart rice cookers.
The news was “really surprising to me,” said Kevin Chen, a Hong Kong-based analyst at China Merchants Securities Co.
The US Defense Dept identified Xiaomi as one of nine companies with alleged ties to the Chinese military — which means American investors will be prohibited from buying their securities and will have to divest holdings by November.
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Other firms targeted include Luokong Technology Corp, Gowin Semiconductor Corp, Global Tone Communication Technology Co. and Advanced Micro-Fabrication Equipment Inc. Index stalwarts such as China’s three biggest telecom firms are already on the list.
Xiaomi said in a statement it is not owned or controlled by the Chinese military, adding that it would take appropriate actions to protect its interests.
Unless the ban is reversed, the smartphone maker risks being delisted from US exchanges and deleted from global benchmark indexes. China Mobile Ltd, China Telecom Corp and China Unicom Hong Kong Ltd were removed by MSCI Inc. last week.
The Trump administration’s blacklistings have focused on Chinese companies with military ties and strategic value to the industry’s growth. Semiconductor Manufacturing International Corp., China’s largest chipmaker and critical to the country’s ability to build a self-sufficient tech industry, was included in December.
Xiaomi was co-founded by billionaire entrepreneur Lei Jun about 10 years ago, with US chipmaker Qualcomm Inc as one of the earliest investors. It’s since expanded well beyond China’s borders, particularly into Europe and India, becoming one of the country’s more recognisable brands. It surpassed Apple in global smartphone sales in the third quarter, according to the International Data Corporation, and joined Hong Kong’s benchmark Hang Seng Index in September.
The move sent Xiaomi suppliers south on Friday: FIH Mobile Ltd., which helps it assemble smartphones, plunged as much as 14 percent after a strong rally in recent days. Component suppliers including Largan Precision Co., Sunny Optical Technology Group Co. and AAC Technologies Holdings Inc. also fell. Spreads on Xiaomi’s dollar bonds widened as much as 40 basis points Friday morning, according to credit traders.
Xiaomi plunges after the Pentagon added it to a blacklist
Separately, the US Commerce Department blacklisted China’s No 3 oil company, China National Offshore Oil Corp., and Skyrizon, which develops military equipment. The Commerce designation is more severe and prohibits American firms from supplying those entities.
Investors may be concerned that Xiaomi could be targeted by Commerce in the future, after the Defense Dept.’s move. Huawei was forced to sell off its Honor smartphone business after it was cut off from American suppliers, including Android-developer Google.
Trump’s increasingly aggressive stance towards Chinese corporations has provoked Beijing, which views the litany of US actions as a threat. The government this month issued new rules to protect its firms from “unjustified” foreign laws and previously talked about creating its own Unreliable Entities list, though no concrete retaliation has emerged.
Despite Friday’s selloff, some investors held out hope that the incoming US administration will reverse actions taken in the twilight days of Donald Trump’s presidency.
“This is not going to be a priority for the Biden administration. This ruling will be reversed before November, so we are going to hold, and not just hold but be a buyer on this weakness,” Vanessa Martinez, a partner at Lerner Group, told Bloomberg TV. “This is just like that last parting shot against China by the Trump administration.”
Chen of China Merchants Securities also argued the fallout for Xiaomi may be limited. “Many investors would choose to lock in profit since the stock rallied a lot in the past year,” he said. “But I think the impact on Xiaomi would be more sentimental than fundamental. These declines could be short-lived.”
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