By JonathanE.Hillman

About the author: Jonathan E. Hillman is a senior fellow for geoeconomics at the Council on Foreign Relations and the author of The Digital Silk Road: China's Quest to Wire the World and Win the Future.

The Pentagon appears to have designs to classify Alibaba and Baidu as Chinese military companies. The Chinese tech giants were added Friday to the Department of Defense's 1260H list -- the government's official roster of firms that it says serve the Chinese military.

Many Americans might not know it, but Alibaba and Baidu are staples in their U.S. mutual funds, which hold more than $30 billion of the firms' stock. Yet investors barely responded to Friday's news. The U.S.-listed shares of both companies finished down less than 2% after the DOD published the list, which it then curiously pulled from its website.

U.S. investors shouldn't feel totally relieved, however. The administration's pushback against Chinese firms is likely to escalate later this year.

The Chinese tech company Tencent's similar experience with the DOD may have prematurely soothed investors. Tencent landed on the 1260H list a year ago. After an initial selloff, Tencent's shares went on to post double-digit gains, driven largely by growth inside China. Some might even see the Pentagon's new designations as a gift to Alibaba and Baidu that could drive more support from Beijing and nationalist Chinese consumers, with few real costs.

But escalation looks more likely than markets expect. For starters, the U.S. government's allegations against the firms aren't merely guilt by association. The White House alleges Alibaba provides capabilities to Chinese military and security entities, enables access to sensitive customer data, and discloses technical vulnerabilities that could be exploited. Congressmembers have accused Baidu of purchasing high-performance computing systems from a sanctioned firm tied to China's nuclear weapons program and collaborating with China's defense research establishment on AI and quantum technologies.

Actually banning U.S. investment in the companies would require the Treasury Department to formally sanction them. Treasury Secretary Scott Bessent isn't likely to do that, as it would risk blowing up the tariff détente with Beijing that he negotiated in November. Nor is President Donald Trump eager to sour relations ahead of his meeting with Chinese leader Xi Jinping in April.

But when political winds shift, the 1260H list can quickly become more than just a warning label against multinational companies. When agencies debate investment bans or export controls, for example, existing designations function as both a red flag encouraging further scrutiny and foundation of evidence upon which other cases can be built. The 1260H is a natural place for agencies to start when they need to develop lists of actions that can be held in reserve and deployed against China.

That seems increasingly likely in the year ahead. The temporary trade detente between the U.S. and China, which is scheduled to last until November, is already fragile. It doesn't resolve the structural disputes at the heart of their trade relationship, such as China's non-market practices, intellectual-property theft, and cyber attacks. Without meaningful progress, another breakdown in the relationship is more likely than a durable deal, especially as U.S. elections in November place pressure on Trump to show tangible action against China.

For a preview of what might follow, just rewind the tape. During the latter part of Trump's first term, national-security findings, stalled trade talks, and domestic political pressure compelled him to delist and ban U.S. investment for China Telecom, China Mobile, and China Unicom. In the months surrounding those actions, the three companies collectively dropped more than $40 billion in market value.

Investors may be tempted to ride Alibaba, Baidu, and other U.S.-designated Chinese military companies for longer. But the underlying risk-reward balance is shifting. Owning companies that provide computing power, data, advanced AI tools, or other forms of support to China's military is increasingly difficult to justify. Investment managers believing otherwise should check in with their clients, or be prepared to explain why Chinese military companies were allowed to remain in their portfolios.

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February 17, 2026 14:44 ET (19:44 GMT)

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