Spy scandal knocks ZTE shares, even though the House said nothing new

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ZTE shares fell 6% Tuesday in Hong Kong after the US House intelligence committee called the Chinese telecom equipment maker an arm of the Beijing government that swipes intellectual property from US companies and might be spying on Americans. US lawmakers leveled similar allegations against its rival Huawei.

The ZTE share drop shows how sensitive fund managers are to reputational issues. These rumours about ZTE, which makes network equipment and mobile phones, have persisted for years. As an analyst at a leading investment bank who covers the stock but asked not to be named because the issue is sensitive puts it, “That gossip has been around for such a long time, you would assume nobody cares that it surfaced in a report.”

In its rebuttal to the House’s allegations, ZTE said its equipment was safe and its business is not directed “or influenced” by the government either. ZTE spokesman David Dai Shu said in a telephone interview he was unaware of previous gossip that the company was a military agent.

The House report looked damaging for ZTE because it effectively shut the company out of the US market. But ZTE does not do much business in America in the first place. Dai said that, in 2011, around 3% of  ZTE’s $14 billion of operating revenuescame from the US.

The knock in ZTE’s share price, however, reflects dissapointment that the company is not going to expand in America. The public nature of the House accusations may also scare off future corporate customers. It is one thing for a small circle of investors to be aware of a rumor, but quite another for that rumor to be broadcast by global media for several days.