ZTE Has to Change Management for U.S. Reprieve, Kudlow Says

(Bloomberg) -- Chinese telecom company ZTE Corp. will have to change its management, including by possibly appointing new board members, to win a reprieve from U.S. sanctions that shut it off from key suppliers, the director of the White House National Economic Council said.

“We’re not talking about letting them off scot-free by any stretch,” Larry Kudlow, President Donald Trump’s top economic adviser, said in an interview on Fox Business Network. “Commerce Secretary Wilbur Ross is having a second look at remedies. If there are any structural changes in their case they will be very harsh: Change of management. Change of board. Change of everything.”

Trump on Sunday ordered the Commerce Department to get ZTE back into business, weeks after the agency cut the company off from U.S. suppliers as punishment for what Ross described as “egregious” violations of sanctions against trade with Iran. Trump said in a tweet “too many jobs in China lost” because of the Commerce Department action.

A representative for ZTE declined to respond to Kudlow’s comment in a phone call. China’s Ministry of Commerce didn’t immediately reply to a faxed inquiry.

It was an abrupt shift from the campaign Trump has mounted against Chinese technology companies, which he regularly accuses of stealing American intellectual property and exploiting unfair trade rules. Trump said on Thursday that his decision to order a review of U.S. penalties on ZTE came directly at the request of Chinese President Xi Jinping.

“This is not a real trade issue, this is a legal enforcement issue,” Kudlow said. “And the question is, the Chinese government has asked for a bit of relief on the remedy. Doesn’t mean there won’t be a remedy; there’ll be a very strong remedy.”

Trump indicated earlier this week the move was related to the trade negotiations.

“ZTE, the large Chinese phone company, buys a big percentage of individual parts from U.S. companies,” Trump said in a tweet on Monday. “This is also reflective of the larger trade deal we are negotiating with China and my personal relationship with President Xi.”

The U.S. blockade forced the suspension of most operations at ZTE, which employs about 75,000 people. The firm’s shares were suspended from trading in Hong Kong last month. ZTE said last week it had suspended all major operations as a result of the U.S. action and its shares stopped trading in Hong Kong last month.

In a sign that both sides are trying to avoid a trade war, Chinese regulators restarted their review of Qualcomm Inc.’s application to acquire NXP Semiconductors NV, according to people familiar with the process. The work had been shelved earlier in response to growing trade tensions with the U.S. San Diego-based Qualcomm supplies semiconductors to ZTE.

Both Republican and Democratic lawmakers have expressed concerns that Chinese telecom companies, such as ZTE, have ties to the Chinese government and pose a cyber espionage threat as they move into the U.S. market.

Derek Scissors, a China analyst at the American Enterprise Institute, said changing leadership or board members at ZTE is a “foolish demand” because they’d only be replaced with similar people.

“It’s hard to be confident, but it does seem the administration has moved in the right direction,” Scissors said, referring to Kudlow’s comments about maintaining harsh penalties. “Sanctions on ZTE should not be bargained away.”

--With assistance from Jenny Leonard, Emma Dong, Gao Yuan and Moxy Ying.

To contact the reporters on this story: Jennifer Epstein in Washington at jepstein32@bloomberg.net;Justin Sink in Washington at jsink1@bloomberg.net

To contact the editors responsible for this story: Alex Wayne at awayne3@bloomberg.net, Joshua Gallu, John McCluskey

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