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Arrest of Huawei executive triggers stock market turmoil and unsettles U.S.-China trade talks

Meng Wanzhou, Huawei’s chief financial officer, was arrested on a U.S. request because Huawei is suspected of trying to evade American sanctions on Iran. (Video: Reuters)

Fresh doubts about a wobbly truce in the U.S.-China trade war Thursday triggered stock market turmoil in the United States and Europe following the unusual arrest at U.S. request of a top executive in one of China’s most prominent corporations.

The Chinese government demanded the immediate release of Meng Wanzhou, Huawei Technologies’ chief financial officer and the daughter of the company’s founder, after she was arrested changing planes in Vancouver, B.C., on Saturday.

She is to appear in court Friday for a bail hearing. If extradited, she is expected to face charges related to Huawei’s alleged violation of U.S. sanctions on Iran.

The incident added an unpredictable element to already unsettled prospects for talks designed to ease a trade conflict that has led to the imposition of tariffs on nearly $400 billion in annual goods shipments between the United States and China.

President Trump and Chinese President Xi Jinping met in Buenos Aires on Dec. 1, 2018. Trump called the two leaders' relationship "very special." (Video: The Washington Post)

To keep the talks on track, Chinese officials must manage pressure from a public outraged at the U.S. move against one of China’s most widely recognized corporations.

“I don’t think it’s going to derail the talks,” said Michael Pillsbury, a China expert at the Hudson Institute and an occasional White House adviser. “But this will be red meat for the conspiracy theorists in Beijing.”

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Meng was arrested on a U.S. extradition warrant because Huawei is suspected of evading American sanctions on Iran, according to multiple news reports. U.S. prosecutors have been investigating since 2016 whether Huawei violated U.S. export and sanctions laws by shipping U.S.-origin products to Iran.

The arrest, on the same day President Trump and China’s President Xi Jinping met for dinner in Buenos Aires for trade and national security talks, is being viewed in China as politically motivated.

Trump learned of Meng’s arrest only after his 2 1 /2-hour dinner with Xi and was livid when he was told, according to a senior U.S. official with direct knowledge of the matter.

National security adviser John Bolton told NPR that the Justice Department had informed him in advance of plans to arrest Meng but that he did not know whether Trump was aware of the pending action.

“These kinds of things happen with some frequency,” Bolton told NPR. “We certainly don’t inform the president on every one of them.”

In Montreal, Canadian Prime Minister Justin Trudeau said there was no political involvement in Meng’s arrest. “The appropriate authorities took the decisions in this case,” he said. “We were advised by them with a few days’ notice that this was in the works, but of course there was not engagement or involvement in the political level in this decision.”

Beijing expressed anger at the arrest and accused the United States of targeting Huawei unfairly. The United States is “resorting to despicable hooliganism,” the nationalist Global Times wrote in an editorial published Thursday. “Anybody can see that the United States is maliciously picking holes in Huawei, trying to give it a hard time using the American legal system,” said the paper, which often reflects the foreign policy views of the ruling Communist Party.

Jeff Moon, who conducted trade negotiations with China during the Obama administration, warned that the arrest could cast a chill on the new talks. “Up until this point, China’s goal has been to preserve the status quo. They have retaliated only after the U.S. acted,” Moon said. “In this case, we may tip them over into active retaliation.”

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Chinese leaders understand that American law enforcement and diplomacy are distinct processes, according to Dennis Wilder, a former China specialist with the CIA. But they will be buffeted by an angry public reaction to what will be interpreted as unfair treatment of a prominent Chinese business executive by American officials determined to prevent China’s rise, he said.

“They do understand — at the top of the system — that these are two tracks,” said Wilder, now the managing director of Georgetown University’s Initiative for U.S.-China Dialogue on Global Issues. “They’ll try to keep the trade talks going. But this may be one of the first times that the public reaction could drive China’s reaction.”

At the White House on Thursday, Trump’s senior advisers lunched with a tech industry group including Oracle chief executive Safra Catz, IBM CEO Ginni Rometty, Qualcomm CEO Steven Mollenkopf and Google CEO Sundar Pichai, according to senior administration officials who briefed reporters on the condition of anonymity.

The meeting was billed as a roundtable on emerging technologies, including artificial intelligence and ultrafast wireless networks, but featured trade-war worries as well, administration officials said.

Robert E. Lighthizer, the president’s chief trade negotiator, and former secretary of state Henry Kissinger attended.

Meng’s arrest followed a rocky rollout for the trade talks, which are scheduled to take 90 days and address chronic U.S. complaints about China’s state-led economy.

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Investors, rattled by the news, sent the Dow Jones industrial average down 785 points in late-morning trading, bringing its two-day decline to nearly 1,600 points. After reports that the Federal Reserve may pause its planned interest rate increases, the index rallied, ending the day down just 0.3 percent from the previous close.

Markets in London, Paris and Frankfurt also sank on trade-war fears.

American analysts in China were surprised at Meng’s arrest.

“My jaw dropped when I saw this news,” said James McGregor, chairman of the greater China region for APCO Worldwide, a business consultancy. “This is so different from anything we’ve seen before — serious legal action taken with political timing.”

China’s Commerce Ministry is trying to not let Meng’s arrest derail the trade talks. “The China and U.S. trade teams are now in smooth communication and good cooperation,” spokesman Gao Feng said. “We are full of confidence that China and the U.S. can reach an agreement within 90 days.”

But at the Foreign Ministry, spokesman Geng Shuang said the Chinese government has made “stern” and “solemn” representations to the United States and Canada over Meng’s arrest.

“We have asked them to clarify the grounds for the detention, to release the detainee and earnestly safeguard the legal and legitimate rights and interests of the person involved,” Geng said.

The investigation into Huawei appears similar to a previous case against ZTE, another Chinese telecommunications equipment company that pleaded guilty last year to violating U.S. export sanctions on Iran. 

ZTE was initially blacklisted in the United States, a move that brought it to the brink of bankruptcy. But after Trump’s intervention, the penalty was downgraded to a $892 million fine and outside monitoring of its business activities.

But no executives were charged in the ZTE case, and Huawei has not been formally accused of breaching the sanctions.

More than almost any other company, Huawei symbolizes the potential and the threat of a rising China. The tech titan has quickly become one of the pillars of the high-tech economy championed by Xi, who has ambitions for China to become the world leader in high-tech manufacturing.

Privately held Huawei employs 180,000 people in some 170 countries and said it made $7.3 billion in profits on $92.5 billion in revenue last year.

But the Shenzhen-based company is synonymous with a darker side of China’s rise, accused in a 2012 House Intelligence Committee investigation of having ties to the Chinese government and possibly “violating United States laws” — allegations that the company has denied.

The United States, Britain, Australia and New Zealand — four of the five countries in the “Five Eyes” intelligence-sharing network, the other being Canada — have blocked Huawei from their new 5G cellular networks, on security grounds.  

The suspicions about spying have their origins in Huawei’s founder — and Meng’s father — Ren Zhengfei, who spent about 20 years in the People’s Liberation Army, including reportedly serving in a military technology division.

Some analysts questioned the timing of the arrest, if not the legal justification.

“There may be a legal basis for this, but politically, the timing is corrosive,” said James Zimmerman, a former head of the American Chamber of Commerce in China. “We’re in the middle of some very sensitive, tense negotiations, and they’re doing something that is unprecedented in four decades of U.S.-China relations.”  

In the past, China has retaliated swiftly against similar kinds of actions. The question now is whether Beijing will risk derailing talks that may offer the best chance of de-escalating a deepening trade conflict.

“I’ve never seen China take something like this lying down,” said McGregor, who has lived in China for nearly three decades. “For now, China seems to be taking a measured approach. But this could get ugly very quickly.”

Tony Romm, Ellen Nakashima and Emily Rauhala in Washington and Yang Liu and Lyric Li in Beijing contributed to this report.

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