Mobile/Wireless Components

ZTE Tumbles Again as US Senate Rejects Rescue Deal

Shares in ZTE fell another 25% in Hong Kong Tuesday after the US Senate voted to reinstate a ban on the Chinese company's use of components made in the US.

ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763)'s share price closed at 9.85 Hong Kong dollars and has now fallen 61.5% since the company resumed trading last week. (See ZTE Is Still in the Danger Zone.)

The sharp drop reflects investor concern that a ban would effectively drive ZTE out of business. The Chinese equipment vendor, which sells networking products and mobile devices, relies heavily on US components, according to earlier press reports, and had ceased all business operations when a ban was in force. (See ZTE Ceases Business Operations After US Ban.)

That ban came into effect after US authorities had charged ZTE with selling its equipment, which included US-made components, to Iran and North Korea, in breach of sanctions against those countries. (See ZTE in Existential Crisis as It Slams 'Unfair' US Ban, Considers 'Judicial Measures'.)

Last week, the ban was lifted by the US Commerce Department following the intervention of President Donald Trump, who previously tweeted that he was working on a rescue deal for ZTE with Chinese President Xi Jinping. (See Trump Says ZTE Can Re-Open... With Conditions.)

In a deal struck with the US Commerce Department, ZTE agreed to pay a $1 billion fine, place another $400 million in "escrow," replace its entire senior management team and board of directors and be subject to greater oversight by US watchdogs. (See ZTE Seeks $11B in Credit, Nominates New Board Members – Report, ZTE Tanks on Trading Resumption, Ejects Entire Management Team and ZTE Fined Another $1B in Rescue Deal With US.)

But US politicians who were angered by Trump's move have now added a clause to the National Defense Authorization Act that would see the ban reintroduced later this year, according to press reports.

The Senate passed that legislation by 85 to 10 votes on Monday night. It has yet to be passed by the House of Representatives and could be watered down before it comes into effect.

The Trump administration is due to meet with Republican members of Congress in the next few days and will ask them to modify language about ZTE in the proposed legislation, according to a report from Bloomberg.

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But there is widespread unhappiness across both the Republican and Democratic parties about Trump's efforts to revive ZTE. The Chinese company's US critics see it as a perennial bad actor and security threat and will be hard to mollify.

Amid the opening salvos of a trade war between the US and China, there is much bitterness at the perceived theft of US intellectual property by Chinese companies.

Aggravating that is concern China could take a lead over the US on the development of important new technologies such as artificial intelligence and 5G, a next-generation mobile standard that might eventually provide connectivity for billions of devices.

ZTE's plight is bad news not only for the Chinese company's investors but also for the US components companies, like Acacia, that count it as one of their biggest customers. (See Acacia Hit Worst by ZTE Components Ban.)

Ironically, then, re-instating the ban could ultimately lead to job losses in the US.

ZTE is dwarfed by larger Chinese rival Huawei, which is also reported to be under investigation by US authorities for breaching sanctions. Nevertheless, US measures that drove ZTE out of business would likely meet with a tough response from the Chinese.

That US and Chinese presidents were apparently in discussions about ZTE's future hints at how much is potentially at stake.

— Iain Morris, International Editor, Light Reading

kq4ym 7/5/2018 | 8:46:14 AM
Behind The Scenes One might speculate if there are investors or stock speculators who might be gaining on the moves by the President and Senate in the ongoing debates about ZTE and other Chinese concerns. With probably large moves in stock prices with these announcements it would seem ripe for those folks to make extraordinary, and most likely illegal stock trades as the stocks move down or in some cases back up after the news has been digested.
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