Security threat? China lashes out at US report on telecom firm Huawei

This week’s congressional report branding two top Chinese telecommunications companies as potential threats to US national security is likely to spark reprisals from Beijing, experts on both sides of the Pacific predict. But the spat is unlikely to provoke a wider trade war between the world’s two largest economies.

In a 52-page report, the US House of Representatives Intelligence Committee warned US companies and government agencies not to do business with either Huawei or ZTE, respectively the world’s second- and-fifth largest manufacturers of routers and other Internet and telecoms gear.

Citing the firms’ unclear relationships with the Chinese government, the report claimed that they “provide a wealth of opportunities for Chinese intelligence agencies to insert malicious hardware or software implants into critical telecommunications components and systems.” Such implants could act as a “backdoor” into sensitive US information systems, sending data back to China, the report suggested.

The report has no legal standing, but its recommendations “will obviously block Huawei’s and ZTE’s future in America,” says Wang Hujun, an analyst at the CCID telecoms consulting agency in Beijing.

“This is a grave blow to the companies,” adds Xiang Ligang, founder of the cctime.com website dedicated to telecoms issues.

Both the companies concerned and the Chinese authorities have slammed the recommendations as simply a bid to keep competitive Chinese companies out of the US market.

“This report, which spurns the facts and is suffused with prejudice, is a vicious expansion of trade protectionism,” fulminated the People’s Daily, the official organ of the ruling Communist Party, in an editorial.

The US report “violated its long-held free market principles and will undermine cooperation and development between the two countries,” Commerce Ministry spokesman Shen Danyang warned.

The often shrill Global Times, a nationalist tabloid also owned by the Communist Party, urged that “China must take retaliatory action against the United States since Chinese companies have suffered unfair treatment.”

Huawei itself hinted at the prospect of such retaliation when spokesman William Plummer warned that the House committee had set a “monstrous, market distorting, trade distorting policy precedent that could be used in other markets against American companies.”

“China is unlikely just to roll over,” predicts Duncan Clark, founder of the BDA consultancy which advises investors in high-tech Chinese industries. “To do nothing would be to acquiesce.”

“Huawei and ZTE cannot challenge the US Congress, but the Chinese government has some options,” suggests Mr. Ligang. “It could launch its own investigation into some of the US companies doing business here, and reduce their sales in China.”

"There could be blowback on the Chinese side that would create serious problems going forward,” agrees Michael Swaine, a China analyst at the Carnegie Endowment for International Peace in Washington. “A very easy target with a lot of investment in China would be Cisco,” the US telecoms gear manufacturer which sells to many of China’s top firms.

Cisco may actually be so important to so many Chinese banks, telecoms providers and power generators that it is safe, suggests Dr. Wang. “I think Cisco is unlikely to suffer if China wants to retaliate,” he says. “Maybe autos or the agricultural sector, where products are easier to replace, will suffer instead.”

Beijing is likely to be cautious in its reaction, “because it does not want to trigger an even bigger trade conflict” at a time when China is already engaged in economic sparing with Japan over a territorial sovereignty issue, says Ligang.

Still, “this report will strengthen the voice of the protectionists here,” worries Mr. Clark, especially as it comes in the wake of President Obama’s decision last month to block the purchase by a private Chinese company of a windfarm in the United States on the grounds that it was close to a military drone test area.

“This is another irritant in a relationship with lots of irritants already and it makes things much more tense,” says Bill Bishop, a US investor and commentator in Beijing. “The whole bilateral atmosphere is heading in the wrong direction.”