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US slaps China’s telecom giant with 7-year ban for breaching sanctions

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The US government has banned sales by American companies to China’s ZTE Corp to punish the Chinese telecommunications equipment maker after it allegedly made false statements during an investigation into sales of its equipment to Iran, reported South China Morning Post (Hong Kong).

The move, which also dragged down some US technology shares, reactivates a block on ZTE’s exports and all sales to the company by US suppliers for seven years. A brokerage cut its estimate for the company’s revenues in 2018 and 2019.

A settlement with Washington keeping the ban from going into effect had been in place since March 2017, after ZTE agreed to punish those responsible for covering up its sales to Iran and pay about two-thirds of a US$1.2 billion penalty.

Those sales of “hundreds of millions of [US] dollars” worth of routers, microprocessors and servers to Iranian entities violated the US’s Export Administration Act of 1979, according to an order by the US Department of Commerce.

“ZTE made false statements to the US Government when they were originally caught and put on the Entity List, made false statements during the reprieve it was given, and made false statements again during its probation,” Secretary of Commerce Wilbur Ross was quoted as saying in an announcement by the department.

Follow-up requests this year for documentation that ZTE punished nearly 40 employees running a unit conducting business with Iran and covering up the deals revealed that disciplinary action had not been taken, contrary to ZTE’s earlier pledges, according to the order.

“The provision of false statements to the US government, despite repeated protestations from the company that it has engaged in a sustained effort to turn the page on past misdeeds, is indicative of a company incapable of being, or unwilling to be, a reliable and trustworthy recipient of US-origin goods,” the department said in its order.

The commerce department’s move comes amid the threat of a US-China trade war in which more than US$250 billion worth of two-way product trade faces punitive tariff walls if the two sides fail to agree on concessions that address the concerns of the US Trade Representative office.

The USTR’s tariffs against China target hi-tech products that are top priorities in Beijing’s industrial modernisation plan, including instruments and apparatus used in telecommunications networks.

As China’s largest publicly traded telecommunications equipment manufacturer, ZTE plays a key role in the country’s ability to compete globally in the industry.

Yin Yimin, the chairman of ZTE, said in a regulatory filing last month that the company expected “an accelerated process of 5G commercialisation” as 4G mobile network operators start to push forward network upgrades.

Still, any interruption in US components would cause ZTE to miss shipments and lose orders, likely cutting the company’s 2018 revenue by 13.5 per cent, and threatening its plan to maintain its edge in 5G telecommunications technology.

“The newly imposed export ban by the US is likely to cause ZTE to lose market share in both transmission and handsets,” Jeffries Group said in a research note. “Expect another settlement with the US to take 3 to 5 months. But customer confidence outside China will take longer to restore, especially potential 5G customers.”

The US commerce department’s action against ZTE prohibits large American companies like Qualcomm and Micron Technology from selling their chips and components to ZTE, China’s largest listed telecommunications equipment supplier.

Shares of smaller companies that rely on sales to ZTE more fell sharply after the announcement.

Acacia Communications Inc, for example, fell by more than a third in NASDAQ trading.

The company said that it was aware of the commerce department’s actions and that it was “taking steps to suspend affected transactions and is assessing the impact of these developments on Acacia”.

The commerce department announcement and official order also referred to ZTE’s sales of telecommunications equipment to North Korea, but did not provide any specifics about those deals.

The department’s findings contradict an earlier statement of ZTE’s violations by the company’s president Zhao Xianming, who said in March 2017, soon before reaching the settlement with Washington, that “ZTE acknowledges the mistakes it made, takes responsibility for them and remains committed to positive change in the company”.

“We have learned many lessons from this experience and will continue on our path of becoming a model for export compliance and management excellence,” Zhao added at the time.

The commerce department’s reactivation of the order against ZTE also obliges the company to pay the remainder of the original penalty, or about US$300 million.

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Reporter: Denes Osvalt
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