(Bloomberg) -- The U.S. is considering cutting off the flow of vital American technology to five Chinese companies including Megvii, widening a dragnet beyond Huawei to include world leaders in video surveillance as it seeks to challenge China’s treatment of minority Uighurs in the country’s west.
The U.S. is deliberating whether to add Megvii, Zhejiang Dahua Technology Co., Hangzhou Hikvision Digital Technology Co. and two others to a blacklist that bars them from U.S. components or software, people familiar with the matter said. The two others under consideration are Meiya Pico and Iflytek Co. Ltd., according to one of the people.
The Trump administration is concerned about their role in helping Beijing repress minority Uighurs in China’s west, they said, asking not to be identified talking about private deliberations. There’s concern also that Hikvision’s or Dahua’s cameras, which come with facial-recognition capabilities, could be employed in espionage, the people said.
Such a move would escalate tensions with China and raises questions about whether the U.S. is going after more of the country’s corporate champions. Trump’s administration last week barred Huawei Technologies Co. from American technology, a move that pummeled shares in U.S. chipmakers from Qualcomm Inc. to Intel Corp., and threatens to damp global economic growth and disrupt the rollout of critical next-generation wireless networks.
Chinese offshore yuan erased earlier gains after Bloomberg’s report. Shares of Hikvision and Dahua plunged in Shenzhen after the New York Times first reported on the potential ban. Both companies have been accused by human rights groups of facilitating Beijing’s persecution of the Uighurs, a Muslim ethnic group, in the western region of Xinjiang. The Trump administration however has held off on taking action because of sensitive trade negotiations with China, the people said. Those talks have since stalled.
The people said that other companies may join the five under consideration on the so-called Entities List, which prohibits the sale of American technology without a special license. Chinese firms such as Hikvision and Dahua are the world’s largest purveyors of surveillance hardware, along with smaller rival Yitu Technology. Others such as SenseTime Group Ltd. and Face++ parent Megvii specialize in image processing software and are less reliant on American components.
“We hope the company receives a fair and just treatment,” Hikvision’s secretary of the board, Huang Fanghong, said in a statement. Dahua representatives had no immediate comment. SenseTime declined to comment, while Megvii and Yitu didn’t respond to requests for comment.
The latest threat will elevate fears in Beijing that President Donald Trump’s ultimate goal is to contain China, triggering a cold war between the world’s biggest economies. In addition to a trade fight that’s rattled global markets, Washington has pressured allies and foes alike to avoid using Huawei for fifth-generation networks that will power everything from self-driving cars to robot surgery, forming the backbone of a modern economy.
At the heart of Trump’s concerted campaign is suspicion that Chinese firms aid Beijing in global espionage while spearheading its ambitions of becoming a technology superpower. The Justice Department accuses Huawei also of willfully violating sanctions on Iran, and last year engineered the arrest of the eldest daughter of Huawei’s billionaire founder. Huawei has denied those allegations.
Senator Marco Rubio of Florida and other senators sent a letter in April to Secretary of State Michael Pompeo and Commerce Secretary Wilbur Ross urging them to impose sanctions against officials and companies “complicit in gross violations of human rights” in Xinjiang. A United Nations assessment said tens of thousands to “upwards of 1 million” Uighurs have been detained.
In a draft letter to Trump dated May 22, Republican Senator Ted Cruz of Texas argued that exporting technology to the Chinese companies not only runs “counter to the foreign policy of the United States, but the stated values of the American companies” involved in the deals.
“I urge you to conduct a comprehensive review of how U.S. technology exports are being utilized by Chinese commercial companies to enable surveillance” in Xinjiang, Cruz wrote.
Hikvision, Dahua and other companies have benefited handsomely from Chinese President Xi Jinping’s unprecedented push to keep tabs on the country’s 1.4 billion people. About 176 million video surveillance cameras monitored China’s streets, buildings and public spaces in 2016, versus 50 million in America, according to IHS Markit.
Hikvision -- the industry leader -- now sells its cameras around the world. Its devices use artificial intelligence, enabling them to conduct facial recognition on a vast scale. That’s helped it build a dominant position in a market that BIS Research says was worth $32 billion in 2017 and will grow 16% a year through 2023. Along with Dahua, it’s a constituent of the MSCI Asia Pacific Index and is among Shenzhen stocks most owned by overseas investors.
(Updates with three other companies’ names in top two paragraphs. A previous version of this story was corrected to spell out Dahua’s full name.)
--With assistance from Steven T. Dennis, Shawn Donnan, Alyza Sebenius, Robert Fenner, Gao Yuan and Lulu Yilun Chen.
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