Smartphone circuit boards sit on a tray in a manufacturing facility at ZTE Corp.’s headquarters (Photographer: Brent Lewin/Bloomberg)

ZTE to Pay a Record Fine to Get Back in Business, U.S. Says

(Bloomberg) -- The U.S. reached a deal to allow ZTE Corp. to get back in business after the Chinese telecommunications company pays a record fine and agrees to management changes, eliminating a key sticking point as the two countries try to avert a trade war.

“We still retain the power to shut them down again,” Commerce Secretary Wilbur Ross said Thursday in an interview on CNBC. He said the Commerce Department’s $1.4 billion fine, including $400 million in escrow, brings U.S. penalties between last year and this year to $2.3 billion.

The U.S. blocked ZTE’s access to U.S. suppliers in April, saying the company violated a 2017 sanctions settlement related to trading with Iran and North Korea and then lied about the violations. The company announced it was shutting down just weeks after the ban was announced.

Under the deal, the ban is suspended for 10 years and can be activated by Commerce should the company commit additional violations during that decade-long “probationary period,” the department said in a statement announcing the agreement.

In a memo to ZTE’s employees, Chairman Yin Yimin said the issue mirrored problems in the company’s management and compliance culture.

“We should hold relevant people accountable and avoid similar issues in the future,” he wrote. “After this issue is resolved, the company will restore operations swiftly and maintain credibility to fulfill its responsibilities.”

U.S. Monitoring

Ross said the U.S. will install its “own compliance people” to monitor the company, and shareholders will bring in new management and board. “These collectively are the most severe penalty” the U.S. has ever imposed on a company, Commerce said in its statement.

ZTE’s deal with the U.S. will likely get it back into business late next week with its stock likely to resume trading in 2-3 weeks, according to analysts at Jefferies in Hong Kong. ZTE suppliers including MOBI Development Co. and Zhong Fu Tong Co. climbed in Asian trading.

An agreement that allows the crippled company to reopen was seen as a key Chinese demand as the world’s two largest economies try to avoid a trade war that could undermine global growth. After a personal plea from Chinese President Xi Jinping to help the company get back into business, President Donald Trump said last month that the initial fine on ZTE would lead to “too many jobs in China lost” and that he would direct his Commerce Secretary to “get it done.”

The U.S. also needs China’s help negotiating the denuclearization of North Korea ahead of a June 12 summit between Trump and North Korea’s Kim Jong Un.

‘Giant Babies’

China’s state media had a lesson for the nation’s companies on Friday: don’t get into the habit of relying on the government for a rescue when you run into trouble. China’s government devoted a lot of resources to save ZTE because it was concerned about the livelihood of its 80,000 employees, but that doesn’t mean such support will always be there, according to a commentary carried on the website of a state radio station.

"Companies shouldn’t be like ‘giant babies’ and should not use commercial interests to force the government to become involved" in any problems, the article from China National Radio said.

Qualcomm Deal

Shares in NXP Semiconductors NV rose 4.9 percent in New York after news of the ZTE deal was announced. The agreement signals that China will be likely to quickly approve the $43 billion acquisition of NXP by Qualcomm Inc., a deal that has been pending for 18 months. Qualcomm rose 1.3 percent.

Trump has threatened to slap tariffs on at least $50 billion in Chinese imports shortly after publishing a final list of targets on June 15. China has vowed to retaliate on everything from U.S. soybeans to airplanes, and said it will abandon its commitments if the U.S. follows through on its tariff threat.

“The Chinese are well aware there’s a new marshal in town,” Ross said. “His name is Donald Trump and he has a very good shot.”

Members of Congress from both major parties said they were concerned about the deal’s national security implications and some have threatened to block any ZTE deal through legislation that could be part of the national defense spending bill.

‘100% Confidence’

“I assure you with 100% confidence that #ZTE is a much greater national security threat than steel from Argentina or Europe. #VeryBadDeal,” Republican Senator Marco Rubio of Florida said on Twitter after the administration’s announcement. He was referring to the White House’s recent decision to impose metal tariffs on trade partners including the European Union.

Senate Majority Whip John Cornyn of Texas said national security was “front and center” of the ZTE deal, and added that replacing the board and requiring compliance officers “goes a long way to addressing some of my concerns about the national security implication.”

“If ZTE were to close down, I have every belief that their assets would then be absorbed by Huawei which is another giant telecommunication company. And they would continue their intelligence gathering around the world,” Cornyn told reporters Thursday. “So shutting down ZTE doesn’t solve the problem.”

Senator Ron Wyden of Oregon, a Democrat and ranking member on the Finance Committee with jurisdiction over trade, and Senate Minority Leader Chuck Schumer of New York called on Congress to reverse the agreement.

Wyden called the deal “a loser for American security and a loser for American workers.”

Trump argues that bilateral trade deficits reflect bad deals for the U.S. that need to be rewritten. U.S. goods exported to China last year totaled $130 billion while Chinese imports to the U.S. totaled $506 billion. That left a U.S. deficit of more than $375 billion.

Meanwhile, the U.S. government is also looking at limiting Chinese investment, and will report by the end of this month how it plans to tighten scrutiny of that. Treasury Secretary Steven Mnuchin wants to rely on legislation to tighten controls, instead of an executive move imposing sweeping new limits, according to three people familiar with the matter.

©2018 Bloomberg L.P.

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