U.S. Backlash Against Chinese Tech Companies Could Backfire

(Bloomberg) -- Judging by the surge in ZTE shares in recent days, investors seem to be feeling pretty confident the worst days are behind the beaten-down Chinese telecom maker that was injected into the middle of U.S.-China trade tensions. Not so fast.

Yes, the U.S. Commerce Department lifted a crippling seven-year supplier ban that threatened to shut down ZTE's business altogether. That’s after President Donald Trump promised to rescue China’s No. 2 telecom equipment maker as a personal favor to Chinese President Xi Jinping.

ZTE paid the final installment of a $1.4 billion penalty for violating U.S. export sanctions and lying about it, replaced its board and agreed to let in U.S.-appointed monitors as part of the deal. ZTE will need weeks to get back on track, but the damage to its business may not be the worst of it.

Spending the past few weeks in the U.S. made it clear to me that the fear factor surrounding Chinese tech businesses is only getting worse among Americans, not better. And that a campaign meant to induce panic over China’s tech ambitions could backfire for the U.S.

In ZTE's case, politicians have ventured from attacking ZTE’s initial misconduct —shipping American-made components to Iran and North Korea— toward a general distrust over whether the company is a pawn of the Chinese government used to "spy and steal from us," according to U.S. Republican Senator Marco Rubio.

He and other politicians have lumped ZTE in with China's No. 1 telecom operator Huawei Technologies in a national defense appropriations bill that bars both companies from selling to US government agencies. The must pass-bill cites a 2015 FBI report that says “China makes no secret that its cyber warfare strategy is predicated on controlling global communications network infrastructure.” The bill sailed through the House and Senate and is being reconciled before being sent to the president for final passage.

It’s worth noting the bill also requires the Secretary of Commerce to now regularly report on Chinese investment in the U.S., specifically singling out companies that align with the country’s 2025 plan to become a global tech leader in semiconductors, artificial intelligence, electric cars and other high-tech fields.

The anxiety is now spilling over into all sorts of tech areas that have nothing to do with national security, causing venture capitalists and companies to steer clear of Chinese investments and investors there to pull out of the U.S.

Alibaba’s venture arm announced only one investment in the U.S. this year, my colleague Selina Wang recently noted, pointing out that in the first five months of the year, Chinese acquisitions and investments fell by 92 percent, the lowest level in seven years, according to Rhodium Group.

The data backs up what’s becoming a common refrain among Chinese entrepreneurs: Do we really even need the U.S. if big markets like Southeast Asia, India, Russia and Europe are welcoming Chinese companies?

It’s certainly wise policy for the American government to monitor Chinese tech investment in the U.S. But it’s also worth keeping an eye on a China fear campaign instituted in the name of national security to make sure it isn’t making America less competitive. Losing out on innovative companies and technology, such as next generation wireless networks that Huawei and ZTE provide, will only hurt America’s position as a global tech leader.

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