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Huawei’s CFO Arrested at U.S. Request, Sparking Outrage in China

Josh Wingrove, Natalie Obiko Pearson and Mark Gurman

(Bloomberg) -- Huawei Technologies Co.’s chief financial officer was arrested in Canada over potential violations of U.S. sanctions on Iran, provoking outrage from China and complicating thorny trade negotiations just as they enter a critical juncture.

China’s embassy in Canada demanded the U.S. and its neighbor “rectify wrongdoings” and free Wanzhou Meng, who is also deputy chairwoman and the daughter of Huawei founder Ren Zhengfei. U.S. equity futures and Asian stocks slid as the episode reignited concerns about U.S.-Chinese tensions.

Meng’s arrest is likely to be regarded back home as an attack on one of China’s foremost corporate champions. While Alibaba Group Holding Ltd. and Tencent Holdings Ltd. dominate headlines thanks to flashy growth and high-profile billionaire founders, Ren’s company is by far China’s most global technology company, with operations spanning Africa, Europe and Asia.

China wants the U.S. and Canada “to clarify the grounds for the detention, to release the detainee and earnestly safeguard the legitimate rights and interests of the person involved,” Foreign Ministry spokesman Geng Shuang said Thursday at a press briefing.

Meng faces extradition to the U.S., said Ian McLeod, a Canada Justice Department spokesman, declining to elaborate. She was arrested Dec. 1 after the U.S. Department of Justice in April opened an investigation into whether the leading telecommunications-equipment maker sold gear to Iran despite sanctions on exports to the region.

The U.S. Department of Justice didn’t immediately respond to a request for comment Thursday.

Meng’s arrest came on the day that Donald Trump and Xi Jinping dined in Buenos Aires, setting in motion a truce in the rising U.S.-China trade tensions. But Huawei itself already had been a flashpoint between Washington and Beijing.

Huawei’s ambitions span artificial intelligence and chipmaking to fifth-generation wireless. That last effort, a massive push into the future of mobile and internet communications, has raised hackles in the U.S. and become a focal point for American attempts to contain China’s ascendancy. Shares in several of its suppliers, from Sunny Optical Technology Group Co. and Largan Precision Co. to MediaTek Inc., fell.

Ren Zhengfei, a former army engineer, has won acclaim at home for toppling Apple Inc. in smartphones and turning an electronics reseller into a producer of networking gear with revenue surpassing Boeing Co. He is regularly named among China’s top executives, and was among 100 business leaders honored for their contributions as the country celebrates the 40th anniversary of opening its economy. His stature at home is roughly comparable to Bill Gates or Michael Dell in the U.S.

“Tencent and Alibaba may be domestic champions and huge platforms in of their own rights, but Huawei has become a global powerhouse,” said Neil Campling, an analyst at Mirabaud Securities Ltd. It is “5G standards that are at the heart of the wider IP debate and why the U.S. and her allies are now doing everything they can to cut to the heart of the Chinese technology IP revolution.”

Canada’s Globe and Mail newspaper first reported the arrest, about which the U.S. Justice Department declined to comment. A spokeswoman for Canadian Prime Minister Justin Trudeau referred questions to his country’s own justice department. Huawei said the arrest was made on behalf of the U.S. so Meng could be extradited to “face unspecified charges” in the Eastern District of New York.

“The company has been provided very little information regarding the charges and is not aware of any wrongdoing by Ms. Meng,” it said in a statement. “The company believes the Canadian and U.S. legal systems will ultimately reach a just conclusion. Huawei complies with all applicable laws and regulations where it operates, including applicable export control and sanction laws and regulations of the UN, U.S. and EU.”

U.S. Senator John Kennedy, a Republican from Louisiana, said those who cheat on sanctions have to “face consequences.”

“We ought to prosecute to the full extent of the law,” Kennedy said in a Bloomberg Television interview Thursday.

Senator Angus King, an independent from Maine, said China’s history of using retaliatory tariffs leaves him worried about possible repercussions.

“That’s certainly a possibility. We’re dealing with a regime that has absolute power over all levers of state power and they may feel they have to respond in some way,” King told CNN, while adding that he didn’t know specifics of the arrest beyond news reports. “Clearly some kind of response in China is absolutely possible.”

In targeting Huawei, the U.S. is threatening one of the companies at the heart of Xi’s long-term campaign to wrest the lead in future technologies and wean China off a reliance on foreign expertise.

Once a purveyor of unremarkable telecommunications equipment, Huawei’s now No. 2 in smartphone shipments and is shooting for the lead in fifth-generation wireless networks while preparing to take on some of America’s biggest chipmakers. It’s already by some reckonings the world’s largest provider of networking equipment to wireless carriers, outstripping the likes of Ericsson AB with growing sales in Europe. It’s declared its intention to surpass Samsung Electronics Co. in phones as well. The company is targeting record sales of $102.2 billion this year.

Trump’s administration this year invoked its name in blocking a Qualcomm Inc.-Broadcom Inc. merger that would’ve been the largest deal ever, saying it would hand the lead in 5G to China. But as far back as 2016, the Commerce Department had sought information regarding whether Huawei was possibly sending U.S. technology to Syria and North Korea as well as Iran. The U.S. previously banned ZTE Corp., a Huawei competitor, for violating a sanctions settlement over transactions with Iran and North Korea. That moratorium -- since lifted -- drove ZTE to the brink of collapse.

U.S. authorities in 2016 also began voicing concerns that Huawei and others could install back doors in their equipment that would let them monitor users in the U.S., something Huawei has denied.

Senator Chris Van Hollen, a Maryland Democrat, said Wednesday night that Huawei and ZTE “are two sides of the same coin – Chinese telecommunications companies that represent a fundamental risk to American national security.”

“While the Commerce Department focused its attention on ZTE, this news highlights that Huawei is also violating U.S. Law,” Van Hollen said in a statement.

It’s unclear whether Meng’s arrest could trigger the same sort of sanctions that ZTE incurred. Such a move would be far more significant given Huawei’s heft.

In August, Trump signed a bill banning the government’s use of Huawei technology based on the security concerns and U.S. allies are either imposing or considering similar moves. That same month, Australia barred the use of Huawei’s equipment for 5G networks in the country and New Zealand last week did the same, citing national security concerns. The U.K. is currently debating whether to follow suit. In November, Huawei said moves against it would hinder the development of 5G in the U.S. and raise prices for consumers.

“This is what you call playing hard ball,” said Michael Every, head of Asia financial markets research at Rabobank in Hong Kong. “China is already asking for her release, as can be expected, but if the charges are serious, don’t expect the US to blink.”

--With assistance from Kevin Hamlin, Alistair Barr, Peter Martin, Erik Wasson and Terrence Dopp.

To contact the reporters on this story: Josh Wingrove in Ottawa at jwingrove4@bloomberg.net;Natalie Obiko Pearson in Vancouver at npearson7@bloomberg.net;Mark Gurman in San Francisco at mgurman1@bloomberg.net

To contact the editors responsible for this story: Jacqueline Thorpe at jthorpe23@bloomberg.net, ;Tom Giles at tgiles5@bloomberg.net, Edwin Chan, Peter Elstrom

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