The world’s third-largest smartphone maker was added to the U.S. military blacklist

Shares of Xiaomi, the world’s third-largest smartphone maker, crashed in Hong Kong trade on Friday after the U.S. Department of Defense labeled it as linked to the Chinese military. Shares of Xiaomi fell as soon as trading began and ended the day 10.3%.

Xiaomi, which specializes in mass and mid-range phones, now sells more smartphones than Apple (AAPL). It has been one of the success stories of 2020. Xiaomi’s shares tripled in value over the year as they gained business from its main continental competitor Huawei Technologies, the main target of North American sanctions. Americans.

The Pentagon on Thursday named Xiaomi one of nine new names on its list of “Chinese communist military companies,” which now includes 44 Chinese corporations. Other notable developments are COMAC, or Commercial Aircraft Corp. of China, which has General Electric (GE) among its suppliers. GE manufactures engines for COMAC passenger aircraft.

Xiaomi was ahead of Apple in the third quarter of 2020 to become the world’s third-largest smartphone vendor, with 13% of the market in the third quarter of 2020, according to Counterpoint Research, up 11% of ‘Apple. Only Samsung, with 22% of the market with 80.4 million phones, and Huawei, with 14% market share, sell more phones worldwide. Xiaomi’s market share has risen five percentage points in one year, while Huawei’s share has fallen.

Xiaomi on Friday issued a statement that “provides products and services for civil and commercial use.” The company “confirms that it is not owned, controlled or affiliated with the Chinese military” and therefore should not be listed. Xiaomi says it will “take the right actions” to protect the company and its stakeholders.

The confusion in China is that many private companies have ties to the state. Even shareholder-owned companies have sometimes written the Communist Party in their letter as the final controller. Any Chinese company would serve the central state if ordered to do so. And telecommunications will always be of interest to military users.

The U.S. Department of Defense said it is “determined to highlight and counter” the development strategy of China’s civilian-military merger, which supports the modernization of the People’s Liberation Army, ensuring the their access to advanced technologies and experience gained and developed even by those in the PRC. companies, universities and research programs that appear to be civilian entities “.

Putting Xiaomi and COMAC on the DoD list means they are now covered by a Nov. 12 executive order from outgoing President Donald Trump. The order states that U.S. investors, whether individuals or funds, can no longer buy shares in these companies. The order went into effect on Jan. 11 for the initial list of 35 companies, which included Huawei, and will apply to start-up companies like Xiaomi 60 days after its inclusion. U.S. investors have until Nov. 11 to sell the shares they have in the first group of companies.

Huawei, which manufactures hardware and telecommunications networking chipsets as well as phones, is on a more significant Washington-based list of entities that prevents companies around the world from supplying it if they use U.S. parts or technology. This is much more extensive than Xiaomi’s current designation, which makes consumer products rather than network systems. The ban on the list of entities makes it extremely difficult for Huawei to get chips for its phones, so it’s important to watch to see if Xiaomi joins in as well.

Xiaomi has ADR shares listed in the U.S. under the marker (XIACF), and U.S. investors own about 15% of its shares. BlackRock (BLK), Vanguard and State Street (STT) own large blocks of stock for their funds.

Xiaomi has its main listing in Hong Kong, where in early December it set a record in terms of bid continuation by selling US $ 3.9 billion worth of shares as a stock refill. It went public with a US $ 4.7 billion IPO in Hong Kong in June 2018. US pressure increases the importance of Hong Kong as a stock exchange for Chinese companies.

Beijing-based Xiaomi offers Apple-like phones at an affordable price and with an open source system that allows users to customize the operation of their phone. Its high-end phones sell for about US $ 400, but their lowest price is less than US $ 100. So far, it has made its major forays into Asia, particularly India, Indonesia, Hong Kong, Singapore and Taiwan. But recently, it is advancing in Europe.

Xiaomi sells few phones in the United States. But it does rely on Qualcomm (QCOM) to supply chips for two-thirds of its phones, so designating a list of entities would be devastating and cut that supply.

The New York Stock Exchange has made the drastic decision to lay off China’s three major telephone companies after receiving a slap with the same military designation.

The NYSE flip-flop decided after pressure from U.S. Treasury Secretary Steve Mnuchin to withdraw China Mobile (CHL), China Telecom (CHA) and China Unicom (CHU), which have a combined market capitalization of 157 billion US dollars. This has caused index providers to also remove indexes from phone companies and other similar stocks, as the Trump order prohibits U.S. investors from trading any securities offered by those companies, as well as derivatives based on those securities.

As a result, US investment banks JP Morgan (JPM), Morgan Stanley (MS) and Goldman Sachs (GS) have derived the sale of derivatives in Hong Kong. They have eliminated 500 due bull / bear contracts, derivative warrants and online warrants that were based on these companies or indices that contain them, such as Hang Seng, the most followed index in Hong Kong, and CSI 300, the index main to follow the actions of mainland China.

The action against COMAC demonstrates the confusion sown by some of Trump’s orders. Trump intervened last February to prevent the U.S. Department of Commerce from denying a license to allow GE to sell jet engines to COMAC.

Trump at the time denied there were national security concerns for U.S. companies supplying Chinese aircraft manufacturers. “We will not sacrifice our companies … using a false term of national security. It must be real national security. And I think people would get carried away,” he told reporters. He also said in a Twitter post that “I want China to buy our jet engines, the best in the world.”

GE also has a joint venture with Chinese aircraft manufacturer AVIC, Aviation Industry Corp., which is also on the DoD’s list of Chinese military companies.

State management Global Times The newspaper, which is often used to communicate China’s foreign policy stance, publishes a story today quoting an academic who says the latest orders could be the Trump administration’s “final frenzy”. Some Chinese netizens joked in case Xiaomi should be congratulated, as the company is successful enough to get the attention of the US Department of Defense.

Xiaomi and Huawei, as well as the teen app TikTok, are some of the most internationally recognized Chinese brands, where few Chinese companies have generated much or no recognition. They have all been the target of Trump’s orders.

The problems facing Huawei have encouraged China to channel funding towards the creation of a national semiconductor and telecommunications industry. He Global Times he cites an unnamed “telecommunications analyst” who says it’s time for ZTE (ZTCOF), Huawei and Xiaomi to work together to “reshape the industrial chain in China and create a completely national supply chain.”

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