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ZTE exits five year ‘probation’, but Chinese firms wary as new sanctions bite

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News last week that ZTE, the world’s fourth-largest maker of telecommunications equipment, is coming out of a longstanding legal straitjacket imposed by the United States government, soon had its shareholders swooning.

The company’s shares soared in Hong Kong and Shenzhen on confirmation that a federal court in Texas had ordered the conclusion of a five-year monitorship, or probationary period, that began in 2017 after ZTE was caught doing business with companies in Iran.

Some of that excitement seemed a little overstated, however. Although the probationary period for the initial offence has come to a close, further penalties were added in 2018 after ZTE was found to have transgressed in other areas. A separate 10-year monitorship was imposed and the company remains subject to this compliance monitor for a further six years.

The stock market reaction to the news seems to suggest that some of ZTE’s shareholders haven’t fully understood the full extent of the oversight demanded of the company.

Alternately, they may have regarded the end of the first monitorship as a signal that Washington is moving towards a more lenient position on the remaining restrictions.

“It’s like a light at the end of the tunnel,” Pan Helin, a research fellow at Zhejiang University, told the Global Times. “It not only means a reduction of management fees for ZTE [i.e. lower admin costs for the monitorship], but may also mean removal of other types of restrictions as well.”

Other commentators on the case have highlighted that the ruling doesn’t change the fact that government agencies in the US are banned from using ZTE equipment or that the company is still classed as a security threat, which blocks telecommunications providers from using government subsidies to purchase its kit. The Federal Communications Commission is also reported to be investigating ways of removing ZTE from existing telecoms networks.

Five years ago ZTE agreed to pay civil and criminal penalties of more than $900 million for skirting US sanctions by selling technology to North Korea and Iran. Washington banned US firms from selling it components including processing chips. The sanction rattled the Chinese as it immediately put a major Chinese tech firm on the verge of collapse.

After a phone call between Chinese leader Xi Jinping and then US president Donald Trump, the Commerce Department struck a new deal a year later that lifted the ban on component sales after ZTE fired its entire senior leadership and paid another $1 billion in fines. A further $400 million was demanded for an escrow account, to be confiscated if ZTE transgressed again in the next 10 years.

The company has survived its hostile treatment in the US with some aplomb: operating income and net profit both hit record highs last year. But there were still doubts that ZTE would exit the initial five-year monitorship last month, because of a separate court action in which a former employee is accused of bringing Chinese nationals into the US illegally.

The ruling last week that this should not delay the end of the probationary period was warmly welcomed by ZTE. “The company is committed to building a world-class compliance enterprise, making compliance the cornerstone of its strategic development and the bottom line of operations, complying with the applicable laws and regulations of the countries in which it operates, and building a comprehensive compliance system,” it promised.

Not that the judge in the case seemed overly enthused by ZTE’s commitments, remarking that its “record of compliance can be summarised in one word—‘sometimes’.”

In Chinese social media, tech bloggers have greeted the ruling with less enthusiasm. Some suggested rather than living with an “albatross on its neck” imposed by Washington, ZTE should simply soldier on like Huawei has been doing.  Huawei’s business has been struggling in the last two years as it sought to cope with the US government’s export bans. Yet it still managed to report last month a 76% jump in 2021 net profit to Rmb113.7 billion, despite of a 29% slump in revenue.

At an event last week – her first public appearance in China since her release after more than 1,000 days in Canada – Huawei CFO Meng Wanzhou sounded more upbeat about the prospects for  Huawei saying it was “now more capable of dealing with uncertainty”.    

All of this comes at a time when the American authorities have kicked off another major round of export controls that block companies from sending a range of goods to Russia, including aviation and defence components, and items like semiconductors and telecom equipment.

Companies and oligarchs said to be linked to Vladimir Putin are bearing the brunt of the sanctions, with Commerce Secretary Gina Raimondo threatening last week that anyone found to have violated the export controls will be punished.

Washington is warning further that any exports to Russia in which American content accounts for more than 25% of the overall value must also be licenced first by the US.

These so-called ‘secondary sanctions’ infuriate the Chinese, which attack them as a breach of their sovereign right to maintain economic and trade exchanges with other nations.

The rebuke was the same from Russian foreign minister Sergei Lavrov when he flew in for a visit to his Chinese counterpart Wang Yi on Wednesday, with a subsequent statement that blasted the sanctions against Moscow for invading Ukraine as “illegal” and “counter-productive”.

Wang insisted that “China-Russia cooperation has no limits”, in a phrase used previously by Putin and President Xi Jinping to celebrate ties between the two governments, adding that Moscow and Beijing are “more determined” to boost cooperation. (They met in the small Anhui town of Tongxi on the sidelines of the Ministerial Conference of Afghanistan’s Neighbours.)

Away from the grandstanding, the situation is more nuanced, perhaps. Bloomberg is reporting that Chinese diplomats in Washington have been in contact with their American counterparts for more information on the sanctions against Russian entities, for example, presumably because they don’t want Chinese companies to face accusations of breaching them. There are also claims that bosses at some of China’s biggest firms are scrambling to better understand the risks of doing business, even pulling out of commercial arrangements with Russian counterparties on a precautionary basis.

One example of the more cautious approach comes from Sinopec, Reuters says, which cancelled a major investment in a gas and petrochemical venture in Russia that planned to export to China.

People familiar with the situation said that officials from Sinopec and two other oil giants were also warned by the Chinese ministry of foreign affairs against buying Russian assets, the news agency added.

Sinopec seems to have mothballed plans to build a $500 million gas plant in a partnership with Sibur, Russia’s largest petrochemical producer, as well. The decision came after it discovered that Gennady Timchenko, a minority shareholder and board member at Sibur, was sanctioned by the US and its Western allies, Reuters claims.


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