Chinese Stocks Tumble On Report Trump Asks Allies To Boycott Huawei

An explosive report published early last month detailing how Chinese intelligence managed to infiltrate hardware used by dozens of US companies and government agencies, from Apple to the Department of Defense, made clear one simple, if disturbing, fact: The US is losing the race to contain China's sprawling intelligence apparatus as it becomes increasingly embedded in the global tech and telecommunications infrastructure.

But the Trump Administration is doing everything in its power to change that. And after threatening the future of one Chinese telecoms supplier (ZTE), the US has been pushing its allies around the world to stop using equipment from another mainland firm with an even larger global reach: Chinese consumer tech and telecoms giant Huawei.

Huawei

The news sent Asian markets reeling on what was expected to be a quiet day, given the US Thanksgiving holiday: Chinese stocks fell, with the Shanghai Composite tumbling 2.7%, sending it to the lowest level since the end of October, while the ChiNext index plunged over 3.3%.

According to the Wall Street Journal, the US government has launched an "extraordinary outreach campaign" aimed at international telecom companies and friendly foreign governments to try and convince them to drop Huawei as a supplier over concerns that equipment produced by the company could be vulnerable to Chinese spies. But beyond the warnings, the US is even said to be considering financial incentives for telecoms firms that abandon Huawei and switch to a US-based or Western-based supplier. The purpose of the push is to stop Huawei components from being used in commercial and government networks over fears that the Chinese government would easily be able to tap into communications flowing through those channels.

American officials have briefed their government counterparts and telecom executives in friendly countries where Huawei equipment is already in wide use, including Germany, Italy and Japan, about what they see as cybersecurity risks, these people said. The U.S. is also considering increasing financial aid for telecommunications development in countries that shun Chinese-made equipment, some of these people say.

One U.S. concern centers on the use of Chinese telecom equipment in countries that host American military bases, according to people familiar with the matter. The Defense Department has its own satellites and telecom network for sensitive communications, but most traffic at many military installations travels through commercial networks.

To justify the campaign, officials who spoke with WSJ said the US feared that the presence of Huawei components could make it easier for China to intercept communications headed to and from US military bases, as not all of these flow through private DoD networks.

One U.S. concern centers on the use of Chinese telecom equipment in countries that host American military bases, according to people familiar with the matter. The Defense Department has its own satellites and telecom network for sensitive communications, but most traffic at many military installations travels through commercial networks.

Some see the campaign as an effort to establish a buffer zone for Huawei products as the US has sought to keep them out of its domestic market. According to WSJ's sources, efforts to combat the growing influence of Chinese telecom firms predate the Trump era.

The international effort pushes out the battle lines of a U.S. campaign to keep Huawei electronics out of the U.S. Some officials see the initiative as part of a broader technological Cold War between U.S.-led allies and China for control of a world that is increasingly digitally connected—and thus increasingly vulnerable to surveillance and malfeasance. They fear the rise of technological giants that could benefit authoritarian governments, including irritants or outright foes of the U.S.

But the timing of this push is key: While US telecoms firms struggle to catch up, Huawei is already preparing to roll out its first batch of 5G technology.

The overseas push comes as wireless and internet providers around the world prepare to buy new hardware for 5G, the coming generation of mobile technology. 5G promises superfast connections that enable self-driving cars and the “Internet of Things,” in which factories and such everyday objects as heart monitors and sneakers are internet-connected.

U.S. officials say they worry about the prospect of Chinese telecom-equipment makers spying on or disabling connections to an exponentially growing universe of things, including components of manufacturing plants.

"We engage with countries around the world about our concerns regarding cyberthreats in telecommunications infrastructure," a U.S. official said. "As they’re looking to move to 5G, we remind them of those concerns. There are additional complexities to 5G networks that make them more vulnerable to cyberattacks."

Setting aside fears about the cybersecurity threat, the US has at least one clear ulterior motive to stymie Huawei's growing global presence: Huawei has already become the dominant global player in 5G - a position that the US covets.

"There is only one true 5G supplier right now, and that is Huawei," said Neil McRae, chief network architect for large British carrier BT Group PLC, at a Huawei event in London earlier this week. "The others need to catch up."

And even after US officials interceded, warning European telecoms about the dangers of using Huawei's equipment, some - including one unnamed Italian company - said they simply couldn't find a suitable replacement for Huawei's equipment.

Though government officials in China and the US have signaled that the meeting between President Trump and President Xi in Buenos Aires is definitely happening, these latest reports support what has become the 'base case' view of most Wall Street banks: Expect little to no progress from the meeting, as even a commitment from the US to delay its planned end-of-year tariff escalation now appears be much of an ask.

Still, President Trump remained upbeat about the prospects for a deal when he told reporters on Thursday that China wanted to do a deal on trade "very badly" and added that the US side is "very happy with that," meanwhile, China’s Vice Minister of Commerce Wang Shouwen said China hoped to meet the US half way on addressing trade issues.

Despite the pleasant words, there's still a not-insignificant risk that the talks lead to a further deterioration in ties between the two countries. If that happens, sectors that have been the hardest hit by the trade war (miners, automakers, chip makers) could take another leg lower.

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