Shares of Baidu Inc dropped by 12%, resulting in a loss of over $4.5 billion in market capitalization.

The drop was triggered by reports linking Baidu's AI system, Ernie, to Chinese military research predicting US military moves.

Baidu denies collaborating with the military lab, but investors are concerned about potential US sanctions and lack of revenue from Ernie.

Allegations emerged that Chinese military agencies and state-run AI research institutes have purchased banned Nvidia GPUs despite US export restrictions.

These allegations might lead to a stricter regulation on AI accelerator sales to China.