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September 21, 2017

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US should block China's Huawei, ZTE: gov't report

WASHINGTON/HONG KONG--China's top telecoms gear makers should be shut out of the U.S. market because potential Chinese state influence on them poses a security threat, the U.S. House of Representatives' Intelligence Committee said in a draft of a report to be released later on Monday.

U.S. intelligence must stay focused on efforts by Huawei Technologies Co. Ltd. and ZTE Corp. to expand in the United States and tell the private sector as much as possible about the purported espionage threat, the panel leaders said, based on their 11-month investigation of the two firms.

The employee-owned and unlisted Huawei is the world's second-biggest maker of routers, switches and telecom equipment by revenue after Sweden's Ericsson. ZTE ranks fifth. In the global mobile phone sector, ZTE is fourth and Huawei sixth.

Huawei generated around 4 percent of its group sales from the United States, while ZTE's U.S. revenues made up 2-3 percent of its overall figure. The bulk of both companies' U.S. sales comes from selling handsets through U.S. carriers such as Verizon, Sprint and T-Mobile USA.

"The impact will be quite limited if the report is referring just to telecoms equipment, but it's another story if handsets are included as well," said Huang Leping, an analyst at Nomura Securities. "Huawei and ZTE handsets have been consistently gaining market share in the United States."

In the U.S. handsets market where Apple Inc and Samsung Electronics dominate, ZTE ranks sixth and Huawei eighth, according to industry figures.

'Political distraction'

The broadside comes as Huawei mulls a possible initial public offering, sources said, as part of its efforts to allay suspicions that have all but blocked its U.S. ambitions, including business tie-ups. Huawei has been looking at the listing issue for years, but there has been little progress due to its complicated share structure and questions over whether a listing would actually help, given that U.S. lawmakers remain suspicious of ZTE even though it's a listed company, analysts said.

Huawei spokesman William Plummer rejected the committee's allegations in a statement emailed to Reuters.

"Baseless suggestions otherwise or purporting that Huawei is somehow uniquely vulnerable to cyber mischief ignore technical and commercial realities, recklessly threaten American jobs and innovation, do nothing to protect national security, and should be exposed as dangerous political distractions from legitimate public-private initiatives to address what are global and industry-wide cyber challenges," he said.

For its part, ZTE released a copy of the letter on Monday it sent to the committee after a hearing in September, stating it "profoundly disagrees" with the claim that it is directed or controlled by the Chinese government. "ZTE should not be a focus of this investigation to the exclusion of the much larger Western vendors," it said.

ZTE's Hong Kong-listed shares fell as much as 3.9 percent on Monday, on track for its biggest one-day drop in more than a month, and lagging a 0.5 percent fall on the benchmark index.

The U.S. panel's draft report faulted both Huawei and ZTE for failing to satisfy its requests for documents, including detailed information about formal relationships or regulatory interaction with Chinese authorities.

U.S. companies thinking about buying from Huawei should "find another vendor if you care about your intellectual property; if you care about your consumers' privacy and you care about the national security of the United States of America," panel Chairman Mike Rogers said in comments broadcast late on Sunday on the CBS News program "60 Minutes."

Rogers and the committee's top Democrat, C.A. Ruppersberger, have scheduled a 10 a.m. Eastern time (1400 GMT) news conference to release the final, unclassified version of their report. The publication comes a month ahead of U.S. presidential elections where China, and its impact on U.S. jobs, has been a campaign issue.

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