LNVGY Lenovo Group Ltd (PK)

By Dan Strumpf 

HONG KONG--The escalating trade fight between Washington and Beijing is sending a chill through investors in Chinese tech companies that sell to the U.S.

Hong Kong-listed shares of Lenovo Group Ltd., the Chinese maker of PCs and servers, fell more than 20% on Friday, while shares of ZTE Corp., which makes smartphones and telecommunications equipment, shed more than 10%. Other Chinese hardware manufacturers also fell, including those that sell to U.S. customers or supply U.S. technology companies.

The selloff comes as the U.S.-China trade dispute ratchets up and brings renewed scrutiny of the interconnectedness of the global technology supply chain, and the potential vulnerabilities and security risks that it entails. A report in Bloomberg Businessweek on Thursday said Beijing used microchips inserted in computing components built for an array of American tech companies to spy on the U.S.

In a statement, a Lenovo spokeswoman said the chip maker linked in the Bloomberg report to Beijing's spying efforts, called Super Micro Computer Inc., "is not a supplier to Lenovo in any capacity. Furthermore, as a global company we take extensive steps to protect the ongoing integrity of our supply chain."

Super Micro Computer denied the Bloomberg report, saying it "has never found any malicious chips, nor been informed by any customer that such chips have been found." A ZTE spokeswoman didn't immediately respond to a request for comment.

Tensions have been rising between the U.S. and China for months. Vice President Mike Pence on Thursday aired a long list of grievances with Beijing and criticized Google-parent Alphabet Inc. for trying to develop a censored version of its search engine in China, where internet access is restricted. A Google spokeswoman declined to comment.

Separately, a White House report on Thursday said U.S. industries tied to national defense faced "unprecedented set of challenges" that have curbed their ability to quickly make crucial military components, in part because the availability of these components is limited to rival countries such as China.

In Chinese markets, attention was on the steep pullback in shares of Lenovo. The company is a top seller of PCs and a major supplier of servers world-wide, which it sells under the IBM brand name. Lenovo bought the server business from International Business Machines Corp. in 2014, and the business has been the key driver of growth for the company in recent years. About a third of the company's revenue came from the Americas region in its last fiscal year.

"This kind of news flow has been in the market on and off the past few years, especially concerning the national security issue," said Hayman Chiu, research director at Cinda International Holdings Ltd. in Hong Kong. "We believe this market sentiment triggered the selloff today in the tech sector, especially for Lenovo."

Shenzhen-based ZTE has long been a top seller of smartphones to the U.S. The company has long been the subject of scrutiny by Washington officials due to concerns its equipment could be used by Beijing to spy on Americans, which the company has long denied.

This year, ZTE found itself at the center of the U.S.-China trade dispute after the Commerce Department slapped the company with an order preventing American suppliers from selling to the Chinese firm. The U.S. Commerce Department later reversed the order in exchange for more than $1 billion in penalties and a change of senior leadership.

Write to Dan Strumpf at daniel.strumpf@wsj.com

(END) Dow Jones Newswires

October 05, 2018 02:59 ET (06:59 GMT)

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