(Bloomberg) -- Baidu Inc. plunged its most in more than a year after a report linked its Ernie AI platform to key military research, spurring concerns about retaliation from Washington.

The search engine firm, generally considered one of China’s leaders in artificial intelligence development, fell 11.5% Monday despite publicly denying the relationship. Traders in Hong Kong cited a South China Morning Post report about how a university affiliated with the People’s Liberation Army’s Strategic Support Force — which oversees cyberwarfare — had tested its AI system on Baidu’s ChatGPT-like Ernie.

Baidu on Monday denied any affiliation or partnership with the institute. But the report about the hook-up with the PLA raised concerns that Washington may consider imposing sanctions on Chinese firms to curtail such collaboration, as part of efforts to contain its geopolitical rival. 

Users in Hong Kong and Taiwan got a “404” error when trying to access an online link to the institute’s research paper on the matter, though it was accessible still from mainland China. The newspaper itself updated its article to remove a reference to a “physical link” between Ernie and the PLA affiliate, without explanation.

“Baidu has no affiliation or other partnership with the academic institution in question,” a company spokesperson said in a statement. “We have no knowledge of the research project, and if our LLM was used, it would have been the version publicly available online.”

Read More: Baidu’s ChatGPT-Style AI Begins to Earn as Sales Beat Estimates

Baidu in 2023 debuted Ernie — the country’s earliest answer to OpenAI’s ChatGPT — jumping to the forefront of a nationwide development frenzy that’s caught up dozens of startups and most tech leaders from Tencent Holdings Ltd. to Alibaba Group Holding Ltd.

What Bloomberg Intelligence Says

Chinese military use of Baidu’s Ernie large language model for an internal AI project, according to a South China Morning Post report, could raise tensions with the US and raises the question of whether this might attract potential US sanctions. Baidu denied knowledge of the project in a statement. We remain cautious on Baidu’s fundamental outlook and expect its core advertising to come under rising pressure in 2024, with AI ventures remaining mired in loss.

- Robert Lea, analyst

Click here for the research.

Baidu’s Ernie Bot amassed 100 million users months after its public rollout, and the company claims its self-developed model has matched GPT-4 in terms of general capabilities.

In their paper, researchers with the PLA institute discussed theoretical situations involving the use of AI in conflicts between nations, including the US and Libya, and posed hypothetical questions to bots such as Baidu’s Ernie. They wrote about how Ernie might be employed in certain cases to determine optimal placement of military forces. One conclusion the researchers reached was that AI models might have limited uses in simulating actual conflicts. They also asked iFlytek Co.’s AI model to convert military maps into text.

Beyond the report, investors are worried about Baidu’s prospects during a Chinese economic downturn — especially with Ernie still some way off from yielding enough revenue to offset a fundamental decline in online advertising. 

“People are worried about sanctions on Baidu obviously after the news report about military ties. They fear that the US government may announce measures to target Baidu,” said Steven Leung, executive director at UOB Kay Hian Hong Kong Ltd. “The overall sentiment over China is weak and US-China relationship is still intense, so investors sell first no matter if the news is true or not.”

--With assistance from April Ma.

(Updates with points from the research paper in the 8th paragraph. A previous version was corrected to show the paper was still accessible from mainland China.)

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