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ZTE gets $5bn Chinese government cash injection

State handout won't play well abroad as SEC clamps down on Chinese firms

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Struggling telecoms kit maker ZTE received a timely boost on Tuesday when the Chinese government effectively stepped in to increase its financing of the firm by $US5bn, although the future of China’s tech giants abroad is looking less certain after an SEC clampdown on accounting practices.

Shenzhen-based ZTE announced that the “financing facility” would expand a deal struck with the state-backed China Development Bank (CDB) in 2009 which saw it given access to $15bn.

"ZTE will leverage the CDB’s financial support and grasp the opportunities in the markets for 4G, fixed broadband, enterprise networks and terminals, consolidate our advantages and migrate to the higher value solutions, as we aim to achieve a global top-3 position before 2015,” said ZTE chairman Hou Weigui in a canned statement.

ZTE has been having a rough time of it recently. In October its top executives agreed to a 50 per cent pay cut until the firm returns to profit after predicting a 260 per cent, or 1.75bn yuan (£174m), revenue decline in the first three quarters compared to 2011.

It has also been on the receiving end of some pretty negative publicity, especially in the US, with the FBI currently investigating allegations if it broke sanctions by selling American-made tech to Iran.

In addition, a recent high profile House of Representatives Intelligence Committee report branded it and Shenzhen neighbour Huawei a national security risk after the telecoms giants were unable to allay US concerns that they are effectively controlled from Beijing.

ZTE’s funding announcement with the CDB, which is under the direct control of the government’s State Council, is only likely to deepen concern abroad that its links with the state are deeper than it is letting on.

The Indian authorities, for example, are currently considering whether to launch their own US-style investigation into ZTE and Huawei over national security concerns.

ZTE is not listed on any US markets but several other big name Chinese tech companies such as search giant Baidu, micro-blog sensation Sina and the world’s biggest mobile operator China Mobile are.

However, their status there appears to be under threat after the SEC said it would be charging the Chinese affiliates of the Big Four and another large US accounting firm BDO for failing to provide audit work papers and other docs according to US securities law and the Sarbanes-Oxley law.

Robert Khuzami, director of the SEC’s Division of Enforcement, said the following in an SEC statement:

"Only with access to work papers of foreign public accounting firms can the SEC test the quality of the underlying audits and protect investors from the dangers of accounting fraud. Firms that conduct audits knowing they cannot comply with laws requiring access to these work papers face serious sanctions."

Paul Gillis, a co-director of the IMBA program at Peking University's Guanghua School of Management, argued that auditing oversight body the PCAOB would now seek to de-register these accounting firms, with potentially huge ramifications.

“Unless resolved, this will likely lead to the delisting of US listed Chinese companies. Multinational companies in China may also face issues since PCAOB rules require an auditor playing a substantial role in the audit of an MNC be registered with the PCAOB,” he wrote in a blog post.

“There are situations where the China Big Four are playing a substantial role in the audit of US MNCs that have substantial operations in China. They may need to resolve this by dividing the work among several firms so that no single firm plays a substantial role.” ®

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