LNVGY Lenovo Group Ltd (PK)

By Dan Strumpf and Steven Russolillo 

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

Hong Kong-listed shares of Lenovo Group Ltd., the Chinese maker of PCs and servers, fell 15% on Friday, while shares of ZTE Corp., which makes smartphones and telecommunications equipment, shed 11%.

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

Concerns about Chinese spying "will likely be a big part of the next phase of the trade war," Mati Greenspan, an analyst at online trading platform eToro, said on Friday.

Other Asian internet and hardware companies fell Friday, following a decline in U.S.-listed peers overnight. Taiwan's tech-heavy index, the Taiex, dropped nearly 2%, with Taiwanese PC maker Acer Inc. dropping more than 5%.

Lenovo said the chip maker linked in the Bloomberg report to Beijing's spying efforts, 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 said it "has never found any malicious chips, nor been informed by any customer that such chips have been found." ZTE declined to comment.

For years, U.S. authorities have expressed concern that some Chinese products could be used to spy on Americans, with the attention falling largely on telecom giants Huawei Technologies Co. and ZTE. Both companies have long denied that they act on behalf of Beijing, and Chinese authorities have voiced similar concerns about American companies operating on their shores.

More recently, the industry has been caught up in the intensifying spat between Beijing and Washington. The U.S. tariffs on roughly $250 billion in Chinese exports have fallen heavily on China's technology sector, which builds a vast range of components for major Western tech firms. China has responded with tariffs on $110 billion of U.S. exports.

On Thursday, Vice President Mike Pence 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. He also reiterated concerns raised by President Donald Trump that Beijing is meddling in the coming U.S. midterm elections.

A spokeswoman for China's Foreign Ministry on Friday said Mr. Pence made "unwarranted accusations" in accusing China of interfering in U.S. internal affairs. "This is nothing but speaking on hearsay evidence, confusing right and wrong and creating something out of thin air," she said. A Google spokeswoman declined to comment

Separately, a White House report on Thursday said U.S. industries tied to national defense faced an "unprecedented set of challenges" that have curbed their ability to quickly make crucial military components.

U.S. military officials have in recent months become vocal about their concerns over the vulnerability of weapons systems to embedded hardware and software attacks.

Ellen Lord, the Pentagon's chief weapons buyer, told reporters Thursday that 90% of the printed circuit boards used by the U.S. military came from Asian plants, half of them in China. The Pentagon has adopted a two-pronged approach to address potential threats, auditing U.S. defense companies for their cybersecurity measures and taking steps to promote more domestic production, including direct investment to expand U.S. output.

In Hong Kong, 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 arm of International Business Machines Corp. in 2014, and the unit has been its key driver of growth in recent years. About a third of the company's revenue came from the Americas region in its last fiscal year.

Kevin Tam, an analyst at Core Pacific Yamaichi International in Hong Kong, said supply chain worries "could have an adverse impact on Lenovo's overseas sales."

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

This year, the U.S. slapped ZTE with an order preventing American suppliers from selling to the Chinese firm, for violating the terms of a settlement agreement resolving its evasion of U.S. sanctions. The U.S. Commerce Department later reversed the order in exchange for more than $1 billion in penalties and a change of senior leadership.

Hong Kong-listed shares of ZTE have lost 57% this year.

Doug Cameron contributed to this article.

Write to Dan Strumpf at daniel.strumpf@wsj.com and Steven Russolillo at steven.russolillo@wsj.com

(END) Dow Jones Newswires

October 05, 2018 08:19 ET (12:19 GMT)

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