China's ZTE shares plunge as US investigations continue...epa05247162 A picture made available on 07 April 2016 shows the company logo of a service station of ZTE products in Yichang, Hubei Province, China, 07 March 2016. According to reports, Chinese multinational telecommunications company ZTE's shares plunged as much as 16 percent on 07 April 2016 as the company resumed trading following a month of suspension. ZTE is currently facing uncertainties as US investigators are controlling its exports. EPA/LIU JUNFENG CHINA OUT
ZTE cut off from US suppliers and barred entirely from doing business in the UK © EPA

Britain and the US have moved against one of China’s largest telecoms equipment makers, adding to a growing list of restrictions imposed by western governments on Chinese companies on national security grounds.

The measures taken against ZTE Corp, which cut it off from US suppliers and bar it entirely from doing business in the UK, come amid a particularly aggressive move by the Trump administration, which has already used the Committee on Foreign Investment in the US, a secretive national security body, to block or force changes to several Chinese-linked deals.

They also are likely to add to mounting economic tension between Washington and Beijing, which are locked in a rhetorical trade war that threatens to impose tariffs on $150bn in bilateral trade.

In a statement on Tuesday, ZTE said it was aware of the US order and that it was ”assessing the full range of potential implications”. The company suspended trading in its shares in Hong Kong and Shenzhen.

US commerce department officials insisted the move was not related to other actions taken in recent weeks by the White House, noting ZTE’s violations were first investigated by the Obama administration. But experts said the sanctions were part of a growing anti-China backlash not only in London and Washington, but also Germany, Australia and Canada.

“Things are pretty rocky right now,” said Matthew Goodman, an expert on US-Asian economic ties at the Centre for Strategic and International Studies in Washington.

“The timing of this is somewhat unfortunate because it could make it seem like they are connected,” acknowledged a senior commerce department official. It also came just hours after Donald Trump resurrected an accusation Beijing was manipulating its currency.

The double blow could prove devastating to ZTE, a Shenzhen-based group that was founded in 1985 as an offshoot of the aerospace ministry. It came to prominence in the 1990s as a mobile networks supplier and has grown rapidly to become one of the world’s largest equipment makers both in China and the US.

The UK’s cyber security watchdog warned British telecoms operators in a forcefully written letter on Monday not to use ZTE equipment because its state ownership raises security concerns. That effectively shuts it out of billions of pounds in contracts to upgrade the UK’s telecoms infrastructure to 5G and full fibre networks.

The US commerce department banned American companies from doing any business with ZTE for seven years after it charged the company with violating a 2017 settlement over allegations it illegally sold equipment, including US parts on a list restricted from export, to Iran and North Korea.

The move would prohibit any US company from doing business with ZTE anywhere in the world.

“This is literally cutting them off from any activity involving the US and any US items whether it’s a pencil or whether it’s a router,” said one former US official familiar with the case.

ZTE pleaded guilty to criminal charges and paid $1.2bn to the US as part of the 2017 settlement, but US officials said the company lied to the commerce department about carrying out disciplinary actions against employees involved in the scheme — in some cases even rewarding those staff with bonuses. Investigators also found ZTE lied to US authorities as part of the settlement talks going back to 2016.

“This egregious behaviour cannot be ignored,” commerce secretary Wilbur Ross said in a statement.

The US government has long barred American telecoms companies from buying network equipment from ZTE’s arch rival Huawei and has considered a plan to build a state-funded 5G network to alleviate security concerns.

Any appeal by ZTE would take months. It also would be unlikely to go in the Chinese company’s favour given that it admitted to misleading the US government. “You really get on the wrong side of the government when you enter into a settlement and provide false information,” said the former US official.

The settlement was also cited as a “relevant factor” by the UK’s National Cyber Security Centre in its warning to telecoms companies that the use of ZTE equipment or services would have a “long term negative effect on the security of the UK”.

Ian Levy, the technical director of the NCSC, sent a letter, obtained by the Financial Times, citing new Chinese laws which allow the state to exert influence over companies and individuals, with “wide ranging powers of compulsion”.

Huawei is one of the largest suppliers of network equipment in the UK having won a key contract with BT 13 years ago. The privately owned company, which has grown to become the world’s largest telecoms equipment supplier since winning that deal, allows its kit to be monitored via a specialist cell, staffed by GCHQ, in Banbury in Oxfordshire to ensure no interference.

The NCSC said it would be “impossible” to protect the UK’s telecoms network if ZTE equipment was deployed at scale as the “mitigations” it has employed to monitor Huawei’s kit would be ineffective. “The result would be an unacceptable national security risk to the UK telecoms infrastructure environment,” the letter said

ZTE is a relatively small player in the UK compared to Huawei although there is some equipment present in the national infrastructure that will now need to be replaced over time.

It works with BT on research and development and has previously said it plans to grow substantially in the British market, where it also sells smartphones. BT said that ZTE was a research partner but that testing did not mean it would lead to a commercial deployment of its technology in the UK.

“BT takes the security of the UK’s critical national infrastructure very seriously and has a robust testing regime in place to ensure that the equipment from all suppliers used in our network remains secure,” a spokeswoman said.

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