Back in Business: U.S. Lifts Ban on ZTE But Will Monitor for 10 Years

Embattled Chinese telecom giant ZTE Corp. breathed a sigh of relief after the U.S. government finally lifted its trade sanctions against the firm on Friday.

The U.S. Department of Commerce rescinded its order prohibiting U.S. firms from supplying components to ZTE shortly after the company placed $400 million in an escrow account at a U.S. bank, the final step in meeting U.S. demands under a settlement agreement, according to a statement released on the department’s website.

The lifting of the ban, which the U.S. slapped on the firm three months earlier, allows ZTE access to key American high-tech components for its products and so resume its business operations worldwide.

ZTE – China’s second largest telecom equipment maker after Huawei Technologies Co. Ltd. – initiated its business recovery plan at 6:33 a.m. on Saturday Beijing time, with employees coming to the office as early as midnight, Caixin learned from sources with knowledge of the matter. The first new order ZTE received came from its terminal business in Mexico, the sources said.

The U.S. decision to lift the ban was pursuant to a June 7 settlement agreement reached between ZTE and the Commerce Department. The agreement "included the harshest penalties and strictest compliance measures ever imposed in such a case," the U.S. agency statement said.

In addition to paying a $1 billion fine and putting an additional $400 in escrow against possible future violations of U.S. export control laws, the agreement required ZTE to replace its entire board of directors and senior leadership, which the firm completed in the last several weeks.

The agreement also required ZTE to employ a team of special compliance coordinators selected by and answerable to the U.S. Commerce Department's Bureau of Industry and Security (BIS) for a period of 10 years.

The team's function is to monitor ZTE's compliance with U.S. export control laws on a real-time basis, the statement said, adding that "this is the first time the BIS has achieved such stringent compliance measures in any case."

The agreement includes a provision suspending an order denying ZTE access to U.S. components for the 10-year probationary period, but which BIS can activate at any time in the event of any additional violations by the company, according to the statement.

The ZTE crisis dates to April 15, when the BIS issued an order prohibiting U.S. firms from supplying components to ZTE after it determined the firm violated a previous March 2017 settlement agreement for selling telecom equipment to Iran and North Korea in violation of U.S. export control laws. ZTE falsely informed the U.S. government that it had disciplined the employees responsible for those violations, the BIS charged.

In the 2017 agreement, ZTE paid a fine, but a provision that would have denied the company access to U.S. components for seven years was suspended so long as it complied with other requirements in the agreement, including disciplining employees. The BIS activated that provision in April when it determined that ZTE had violated the terms of the agreement.

Given ZTE’s heavy reliance on U.S. components for many of its products, the activation of the ban in April forced it to suspend business operations and so became a threat to the company’s continued existence. Chinese President Xi Jinping and U.S. President Donald Trump reportedly intervened, resulting in negotiations that produced a new settlement agreement to keep the company alive.

But the episode was very costly. ZTE expects a net loss of 7 billion yuan to 9 billion yuan ($1.0 billion to $1.3 billion) in the first half of this year, according to its stock exchange filing (link in Chinese) released on Friday, a sharp turnaround from the profit of 2.3 billion yuan it earned in the same period last year.

ZTE suspended trading of its shares after the activation of the ban in April, and resumed trading in mid-June after signing the new agreement with the U.S.

ZTE’s share prices picked up recently after plummeting for an initial period after the resumption of trading. Its Shenzhen-listed share price jumped 5.9% on Friday, while its Hong Kong listing eased 1.4% after a strong 25.1% rise the previous day. But even after these gains, ZTE’s share prices are still down about 55% in Shenzhen and 45% in Hong Kong since the April ban.

Contact reporter Lin Jinbing (jinbinglin@caixin.com)