(This Jan. 6 story has been corrected to remove the stock symbol from Autel Robotics, which was erroneously identified with the symbol of its prior parent firm Autel Group, in paragraph 9)

By Michael Martina, David Shepardson and Karen Freifeld

WASHINGTON/NEW YORK (Reuters) - The U.S. Defense Department said on Monday it has added Chinese tech giant Tencent Holdings and battery maker CATL to a list of companies it says work with China's military, in a move set to escalate U.S.-China tensions.

Hong Kong-listed shares of Tencent, the parent of Chinese instant messaging app WeChat, fell 7.3% on Tuesday, losing about HK$275 billion ($35.4 billion) in market value. Shenzhen-listed shares of CATL closed 2.8% lower, shaving off 32.2 billion yuan ($4.4 billion) in market value.

Both companies called the move, which comes two weeks before U.S. President-elect Donald Trump takes office, a "mistake".

Tencent said on Tuesday its business would be unaffected and that it would initiate a reconsideration process to correct its inclusion and, if necessary, undertake legal proceedings.

CATL, the world's largest electric vehicle battery maker, said it was "not engaged in any military-related activities".

While the designation does not involve immediate bans, it can be a blow to the reputations of affected companies and represents a stark warning to U.S. entities and firms about the risks of conducting business with them.

It could also add pressure on the U.S. Treasury Department to sanction the companies.

The annually updated list of Chinese military companies, formally mandated under U.S. law as the "Section 1260H list," designated 134 companies, according to a notice posted to the Federal Register.

It also included chip maker Changxin Memory Technologies, Quectel Wireless, drone maker Autel Robotics and China's largest shipping company COSCO Shipping Holdings, according to a document published on Monday.

Chinese state-owned plane maker Commercial Aircraft Corporation of China (COMAC) was also on the list.

Two entities owned by Chinese state-owned oil major China National Offshore Oil Corporation were also listed, CNOOC China Ltd and CNOOC International Trading. CNOOC itself was already on the list.

A Quectel spokesperson said the company "does not work with the military in any country and will ask the Pentagon to reconsider its designation, which clearly has been made in error." Quectel's shares fell nearly 7%.

COSCO's HK-listed shares dropped more than 4%. It and the other companies did not immediately respond to requests for comment.

The Chinese foreign ministry told a daily briefing on Tuesday that it urged the U.S. to immediately lift "illegal unilateral sanctions" against Chinese enterprises, adding that China would safeguard the legitimate rights and interests of its companies.

IMPACT ON COMPANIES

The update to the list is one of numerous actions taken by Washington in recent years to highlight and restrict Chinese companies it says pose security risks, weighing on relations between the world's two biggest economies.

Jefferies said in a research note that the purpose of the list was to express the opinion of the Defense Department which could serve as a reference for other government departments.

Morningstar senior equity analyst Ivan Su said he believed Tencent had a good chance to secure exclusion through U.S. courts, but that its inclusion could result in reputational damage.

Tencent's U.S. earnings exposure was in the high-single-digit percentage range, he added, mostly made up of gaming revenue.

"While this represents the maximum potential downside, we see it as highly unlikely that Tencent's U.S. gaming revenue will be affected over the near term."

Craig Singleton, a China expert at the Foundation for Defense of Democracies, said the additions showed that it was "reckless" for American firms to conduct business with a growing swath of Chinese corporations.

"The U.S. isn't just safeguarding a handful of technologies anymore," he said. "The garden of sensitive technologies is growing, and the fence protecting them is being fortified."

Other companies added include MGI Tech, which makes genomic sequencing instruments, and Origincell Technology, which lawmakers have alleged operates a cell bank network and bio-storage technologies.

MGI declined to comment, and Origincell did not immediately respond to a request for comment.

U.S. lawmakers had pushed the Pentagon throughout 2024 to add some of the companies, including CATL, to the list.

Ford Motor is building a battery plant in Michigan and plans to license CATL technology to produce low-cost lithium-iron batteries at the facility - a move that has sparked concerns by some lawmakers. Ford did not immediately comment on Monday.

John Moolenaar, chairman of the House of Representatives' select committee on China, said he was "encouraged" to see the companies added to the Pentagon list.

"We cannot allow these loaded guns to threaten our economy and security," Moolenaar said.

Two previously listed companies, drone maker DJI and Lidar maker Hesai Technologies, both sued the Pentagon last year over their designations, but remain on the updated list. 

The Pentagon also removed six companies it said no longer met the requirements for the designation, including AI firm Beijing Megvii Technology, China Railway Construction Corp, China State Construction Group and China Telecommunications Corp.

($1 = 7.7730 Hong Kong dollars)

($1 = 7.3250 Chinese yuan renminbi)