The U.S. Department of Defense, on Monday, added several Chinese firms, including Tesla Inc. (TSLA  ) supplier Contemporary Amperex Technology Co. Limited (CATL), Tencent Holdings (TCEHY  ), to its list of companies allegedly supporting Beijing's military efforts, causing a sharp decline in their stock values.

What Happened: The U.S. Department of Defense expanded its "Section 1260H list" to include Tencent Holdings and CATL, citing their alleged contributions to China's military advancements. This move serves as a warning to U.S. entities regarding the potential risks of engaging with these firms.

Following the announcement, Tencent's shares dropped by 7.8% in Hong Kong, while CATL's stock saw a 6% decline in Shenzhen. Both companies denied any involvement with China's military and expressed their intent to cooperate with U.S. authorities to rectify the situation.

Why It Matters: The U.S. blacklisting of Tencent and CATL comes amid heightened trade tensions, with both nations targeting each other's key industries. On Thursday, China's Ministry of Commerce imposed new trade controls, adding 28 U.S. companies to an export control list and banning the export of dual-use items that serve both military and civilian purposes. Major U.S. defense contractors, including Lockheed Martin (LMT  ) and Boeing (BA  ), were also placed on China's Unreliable Entity List, prohibiting their operations in China and restricting executives from entering the country.

This back-and-forth escalation highlights the growing challenges faced by global businesses navigating geopolitical uncertainties. Experts, like Andrew Gilholm of Control Risks, note that while many sanctions are symbolic, the expanding scope and frequency of these actions signal a more aggressive stance from both nations. Additionally, Chinese firms are responding to U.S. restrictions by rebranding and establishing U.S.-based entities to sidestep sanctions, further complicating regulatory landscapes.