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Regulation

US Lifts Some Restrictions on ZTE

The US government has temporarily lifted some of the restrictions imposed on ZTE, allowing the embattled Chinese equipment vendor to provide support to existing customers while it tries to meet conditions for a full reprieve.

The US Commerce Department said ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) would be able to operate existing networks and equipment and provide support for handsets. It will also be allowed to receive payments from customers for these services.

ZTE's customers and suppliers will be able to share security information with it as long as the data is needed for the maintenance of existing equipment.

The order, effective until August 1, will help to keep ZTE afloat after it was banned in mid-April from buying any US components. It will equally welcome to operators that use ZTE's products and have been reviewing their relationships with the Chinese vendor due to concern it might go out of business.

US authorities imposed a ban on ZTE after charging it with selling equipment to Iran and North Korea, in breach of US sanctions. (See ZTE in Existential Crisis as It Slams 'Unfair' US Ban, Considers 'Judicial Measures', US Govt. Bans Domestic Component Sales to ZTE.)

After paying a $900 million fine last year, when it was first accused of violating those sanctions, ZTE claimed to have made amends by firing staff responsible for the abuses and introducing new compliance systems. But US authorities earlier this year ruled that ZTE had issued false and misleading statements about improvements at its business.

ZTE relies on US components for about 80% of its products, according to earlier press reports, and had to cease business operations just weeks after the imposition of the US ban. It was said at the time to have racked up losses of about $3 billion while its facilities were dormant. (See ZTE Ceases Business Operations After US Ban and ZTE Racks Up Losses of $3B After US Ban – Report.)

Besides hurting ZTE and forcing operators to consider using other vendors, the ban has been a huge blow for the US components makers that count ZTE as one of their biggest customers. The share price for Acacia, an optical equipment specialist, fell by 36% on news of the ban, to $25.63, although it had crept back up to $34.17 on July 3. (See Acacia Hit Worst by ZTE Components Ban.)

With 75,000 ZTE jobs at stake, US President Donald Trump tweeted in mid-May that he was in discussions with Chinese President Xi Jinping about a deal that would allow the company to resume operations. (See Trump Says ZTE Can Re-Open... With Conditions and Trump Tweets on ZTE… & Gives the Chinese Vendor a Lifeline!)

The US Commerce Department subsequently announced that it would lift the ban if ZTE agreed to pay another $1 billion fine and replace its entire board of directors and senior management team. It will also need to place $400 million in escrow for ten years, in case of further wrongdoing, and install a new compliance team overseen by US authorities. (See ZTE Fined Another $1B in Rescue Deal With US.)

ZTE is now working to meet those conditions and announced earlier this week the appointment of a new board comprising eight directors. (See ZTE Unveils New Board in Effort to Appease US Lawmakers and ZTE Seeks $11B in Credit, Nominates New Board Members – Report.)


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However, opposition to the deal that Trump seems to have brokered is running high in the US political establishment, with various Republicans and Democrats apparently determined to overturn the arrangements.

On June 19, the US Senate voted to reinstate the ban, triggering a sharp fall in ZTE's share price in Hong Kong. That closed at HK$12.38 ($1.58) today, down from HK$25.60 ($3.26) in mid-April. (See ZTE Tumbles Again as US Senate Rejects Rescue Deal ZTE Is Still in the Danger Zone and ZTE Tanks on Trading Resumption, Ejects Entire Management Team .)

Several US politicians who support the ban want further clarity on the actions that operators and suppliers can take to remove ZTE's products and services. (See ZTE Ban Gets Murkier as US Senators Seek Clarification .)

In a letter written to US Commerce Secretary Wilbur Ross, Republican Senators Tom Cotton and Marco Rubio and Democrat Chris Van Hollen said: "The Denial Order … has created uncertainty as to whether telecommunications operators and other customers can take actions to remove ZTE items from their network infrastructure and install products from other suppliers, and whether other suppliers can take actions to provide these customers with alternative products to ZTE items."

— Iain Morris, International Editor, Light Reading

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