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Why ZTE Shares Are Plunging Again

June 19, 2018, 11:11 AM UTC

ZTE Corp. dived 27% after American lawmakers passed a bill to restore severe penalties on China’s second-largest telecoms gear-maker, potentially up-ending a deal struck with President Donald Trump to allow it to get back in business.

The company has lost $7.2 billion of market capitalization in the past week, as its Hong Kong shares slid to their lowest in a year Tuesday and the Shenzhen stock plunged the 10% daily limit for the fourth straight day. ZTE has struggled to end a seven-year ban on American technology purchases that has crippled its business.

The selloff ensued after the U.S. Senate passed legislation that would restore penalties on the company, complicating Trump’s efforts to ease sanctions on ZTE after it pays a record fine and reshuffles management. A settlement on the issue is also deemed pivotal to tense U.S.-Chinese negotiations over trade. But the wrangling over the company produced a rare instance of Republicans allying with Democrats to defy Trump.

“This is the first time Congress has really stood up to him on a trade issue, and it’s clear they are angry,” said Bill Reinsch, a senior adviser at the Center for Strategic and International Studies in Washington. “There will be a lot of congressional resistance to weakening the ZTE amendment, but I would not be surprised to see a compromise.”

Reinstating a ban would cut off ZTE’s access to the chips and components it needs to build smartphones and networking equipment — essentially a death sentence. The bipartisan Senate measure, part of a defense bill, passed 85-10 and came two days before Trump was to host Republican members of Congress to discuss ways to allow ZTE to get back into business.

Trump’s agreement with ZTE was struck after the U.S. in April blocked its access to U.S. suppliers, saying it had broken a sanctions settlement and then lied about it. That prompted the company to declare its operations were grinding to a halt just weeks later. A settlement was deemed a key Chinese demand as the world’s two largest economies try to avoid a trade war and negotiate the denuclearization of North Korea. After a personal plea from Chinese President Xi Jinping, Trump last month instructed the Commerce Department to find a solution to save ZTE.

The Trump administration wants legislators to modify the Senate language on ZTE in the defense bill, once the House and Senate begin work to merge their versions of the legislation. Lawmakers hope to wrap up negotiations by the end of July. Commerce Secretary Wilbur Ross and Treasury Secretary Steven Mnuchin in recent weeks have tried to persuade lawmakers of the administration’s approach to ZTE, but legislators said the deal failed to address their national-security concerns.

“We’ve articulated our desire to better educate members about the ZTE action by Commerce, and we expect to address it in conference,” White House legislative liaison Marc Short said last week.“We think we can fix it in conference,” Short added, referring to the process when differences in House and Senate bills are reconciled.