(Bloomberg) -- The US government's increased reliance on a Pentagon blacklist to target China's biggest companies threatens to cast a pall over President Donald Trump's summit this week with his Chinese counterpart, Xi Jinping.
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The once-obscure roster of companies accused by the Defense Department of helping China's military has morphed into one of the Trump administration's most favored tools to pressure Beijing, ensnaring the crown jewels of China's corporate world and emerging as a major irritant for Xi's government.
Mandated by Congress and known in Washington as 1260H, the list has rapidly expanded to feature nearly 200 companies, including some of China's biggest brand names. The most recent version of the list added Chinese artificial intelligence champions Alibaba Group Holding Ltd. and Baidu Inc., as well as BYD Co., the world's biggest producer of electric vehicles.
Following the latest update in June, Chinese officials issued a sharp rebuke and retaliated with export and procurement restrictions targeting US businesses. Some of the highest-profile Chinese designees, such as Alibaba, have also sued the Pentagon seeking their removal from the list, which is increasingly being used to restrict companies including by limiting their ability to contract with the government and discouraging lobbyists from representing them.
For now, the Trump administration hasn't signaled any willingness to back down, with the 1260H list providing crucial leverage in the deepening competition between the world's two largest economies over AI and other advanced technologies. Talks between Trump and Xi this week are set to include AI, with China expected to air its complaints that the US has sought to maintain its lead in the technology by targeting Chinese companies. Increased use of the Pentagon's 1260H list has coincided with accusations by White House officials and national security agencies that China's top AI developers including Alibaba have improperly extracted data from Silicon Valley firms including Anthropic PBC and OpenAI to build rival chatbots. China's Foreign Ministry has rejected the US claims, and warned of reprisal if the Trump administration seeks to impose any sanctions.
"I would not be surprised if Beijing raises 1260H around the summit, particularly because several prominent Chinese companies now on the list are also being discussed as part of Xi's business delegation," said Craig Singleton of the Foundation for Defense of Democracies, a Washington-based think tank. "But there is a big difference between China raising the issue and Washington being prepared to bargain away the list."
Chinese officials are considering inviting BYD executives to join Xi's entourage in DC, while media including the South China Morning Post have reported that fellow blacklistees such as Zhongji Innolight Co. and Contemporary Amperex Technology Co. Ltd. may also form part of the delegation.
The most recent 1260H update came shortly after the leaders' last meeting in May, when Trump traveled to Beijing to sit down with Xi. That timing prompted criticism by Chinese state media. "If the US president's first visit to China in nine years last month was intended to stabilize relations, the Pentagon's latest move does the opposite," read a June 14 editorial in the China Daily.
Ahead of this week's summit, senior officials from the US and China met in New York on Sunday for talks on artificial intelligence and trade that each side described in upbeat terms. Treasury Secretary Scott Bessent said the two countries had agreed to create what he called a "US-China AI dialogue" meant to develop a common understanding of the technology's risks and benefits.
Some lobbyists are hoping the positive tone will carry through to the discussions in Washington, and potentially create a path for the Pentagon to remove those designations.
"There's a lot of people hoping the summit unlocks things," said Aaron Cutler, who leads Hogan Lovells Cadwalader's government relations practice.
"The Chinese are pretty sophisticated and they're probably looking at the polling. I think they're going to come at the summit pretty hard," said Cutler, who used to lobby for 1260H-listed companies until new restrictions that took effect June 30 effectively forced lobbyists to choose between working for designated firms or US defense contractors.
John McEntee, who's lobbying to help lift 1260H designations on Chinese tech champion Tencent Holdings Ltd. as well as optical transceiver maker Zhongji Innolight, said the Pentagon list and other rosters, such as the Federal Communications Commission's "covered list" of technology products deemed national security threats, have touched off an "unproductive confrontation with China."
The designations "are an unnecessary point of tension in a relationship that the president has made great progress in restoring," said McEntee, who was a senior White House official in Trump's first term. "Trump's appointees should update the lists to reflect their boss's thinking."
Meanwhile, other 1260H-designated companies are fighting the Pentagon in court. In the past few months, Alibaba, biotech champion WuXi AppTec, Hesai Group — the world's largest maker of lidar sensors used in cars — and drone maker DJI have scored interim legal victories in lawsuits they filed in US federal courts seeking their removal from the 1260H list regarding issues such as evidentiary and procedural standards.
The rulings have been closely watched and celebrated in Chinese state media, with the state-run Global Times on Aug. 17 touting an "exclusive" that DJI, whose legal name is SZ DJI Technology Co., had won a procedural victory in its lawsuit against the Pentagon.
Still, advisers in Washington who track the issue caution recent court victories are just one step in what may be a long legal battle and that the final outcome is uncertain. Historically, few companies have successfully used litigation to get removed from the list, with courts typically deferring to the Pentagon's national security concerns.
As US courts increase scrutiny over the Pentagon's list and whether it's being used fairly, Congress is moving in the opposite direction. Since last year, lawmakers have introduced a total of 64 bills with "1260H" in their text, according to a search of public legislative data, including measures that called for deporting designated companies' employees and barring investors from trading their stock.
The list is even addressed in the House and Senate versions of the annual must-pass defense authorization bill. Provisions under review include identifying the many types of government "assistance" that would qualify an entity for a 1260H designation and setting the Chinese government ownership threshold for designating a company at a single publicly-traded share.
--With assistance from Nectar Gan and Alan Wong.
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