Are Huawei and ZTE State-Owned Enterprises?

The House Intelligence Committee seems to think so.  The designation of a company as a state-controlled enterprise has important effects under the rules governing the Committee on Foreign investment in the United States (CFIUS): deals resulting in control of US enterprises by foreign government-controlled entities will automatically be formally investigated by CFIUS.

Gauging state control over an enterprise is not an easy task, as the official report explains:

Chinese telecommunications companies provide an opportunity for the Chinese government to tamper with the United States telecommunications supply chain. That said, understanding the level and means of state influence and control of economic entities in China remains difficult. As Chinese analysts explain, state control or influence of purportedly private-sector entities in China is neither clear nor disclosed. The Chinese government and the Chinese Communist Party, experts explain, can exert influence over the corporate boards and management of private sector companies, either formally through personnel choices, or in more subtle ways. As ZTE’s submission to the Committee states, “the degree of possible government influence must vary across a spectrum.”

The Committee thus focused primarily on reviewing Huawei’s and ZTE’s ties to the Chinese state, including support by the Chinese government and state-owned banks, their connections to the Chinese Communist Party, and their work done on behalf of the Chinese military and intelligence services.

Interestingly, the House Report often focuses on what it did not find, i.e., evidence that Huawei and ZTE were not connected in important ways to the government, the Chinese Communist Party, or the People’s Liberation Army. 

The report’s recommendations are severe. Among them are:

Recommendation 1: The United States should view with suspicion the continued penetration of the U.S. telecommunications market by Chinese
telecommunications companies.

  • The United States Intelligence Community (IC) must remain vigilant and focused on this threat. The IC should actively seek to keep cleared private sector actors as informed of the threat as possible.
  • The Committee on Foreign Investment in the United States (CFIUS) must block acquisitions, takeovers, or mergers involving Huawei and ZTE given the threat to U.S. national security interests. Legislative proposals seeking to expand CFIUS to include purchasing agreements should receive thorough consideration by relevant Congressional committees.
  • U.S. government systems, particularly sensitive systems, should not include Huawei or ZTE equipment, including component parts. Similarly, government contractors – particularly those working on contracts for sensitive U.S. programs – should exclude ZTE or Huawei equipment in their systems.

Recommendation 2: Private-sector entities in the United States are strongly encouraged to consider the long-term security risks associated with doing business with either ZTE or Huawei for equipment or services. U.S. network providers and systems developers are strongly encouraged to seek other vendors for their projects. Based on available classified and unclassified information, Huawei and ZTE cannot be trusted to be free of foreign state influence and thus pose a security threat to the United States and to our systems.

The report also calls for greater transparency from Chinese firms, and this really is a necessity.  The trouble for China is that the activities of just one or two SOEs taint  investment activity by any of China’s state-controlled enterprises.  If China Investment Corporation is concerned with the politicization of CFIUS process (and I agree that this is a serious concern), it can place some of the blame within China’s own borders; lack of SOE transparency may provide cover for protectionist responses just as it may generate real concerns with national security.

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