U.S. Panel Calls 2 Chinese Firms ‘National Security Threat’


WASHINGTON — The House Intelligence Committee recommended on Monday that American companies should be blocked from carrying out mergers and acquisitions involving two Chinese telecommunications firms, saying their equipment could be used for spying in the United States. The recommendations, the result of a yearlong investigation, also said the United States government should not use equipment from the companies, the giant Huawei Technologies and ZTE Inc., and that American companies should find alternative suppliers as well.

A report on the inquiry described the companies as a “national security threat” to the United States, saying that the committee had obtained internal documents from former employees of Huawei that show it supplies services to a “cyberwarfare” unit in the People’s Liberation Army. The committee said that the United States government should go through the federal Committee on Foreign Investment to carry out its recommendations to block any business or other transactions involving the Chinese companies.

The report was presented by Representative Mike Rogers, Republican of Michigan, the chairman of the House Intelligence Committee, and Representative C. A. Dutch Ruppersberger of Maryland, the top Democrat on the committee.

It was the latest development to highlight the sensitive terrain that the United States and China are navigating as they try to build their commercial ties. Those efforts have formed part of the political dialogue just weeks ahead of the presidential elections, as both candidates have spoken of the importance of United States ties with China and have promised to act strongly on Chinese currency and trade practices that are damaging to American business interests.

Mitt Romney, the Republican presidential candidate, has called repeatedly during his campaign for a more confrontational approach to China on business issues, although he has focused his warnings more on Chinese currency market interventions than on the business activities of Chinese telecommunications companies.

President Obama has also taken a tougher stance on China recently. Late last month, Mr. Obama, through the Committee on Foreign Investment, ordered a Chinese company to divest its interest in four wind farm projects near an Oregon Navy base where drone aircraft training takes place. It was the first time a president had blocked such a deal in 22 years. Also this month, the Obama administration filed a case at the World Trade Organization in Geneva accusing China of unfairly subsidizing its exports of autos and auto parts, the ninth trade action the administration has brought against China.

The report on Monday opened up the potential for a new salvo, broadening the discussion of China’s expansion plans in the telecommunications sector.

The report included a classified annex, but several cybersecurity officials said they did not know whether the Congressional Committee had discovered evidence that the telecommunications firms had added “backdoors” making it possible to surreptiously gain access to the products.

In testimony before the Committee in September officials from both Huawei and a second Chinese Telecommunications vendor ZTE, said that alleged backdoors were actually software flaws and not intentional vulnerabilities.

Huawei has been the subject of many criticisms and security warnings for years, including by the Defense Department, and the company’s expansion plans in the United States have faced resistance from Congress over questions about its ties to the military in China.

Huawei denies being financed to undertake research and development for the Chinese military, and its executives have repeatedly insisted that they have nothing to hide. The company issued an open letter to the United States government in February 2011, asking to be investigated so as to clear up what the company characterized as misperceptions about its history and business operations.

At a news conference, Mr. Rogers and Mr. Ruppersberger said they told the Chinese companies that they had to be more transparent but were disappointed by incomplete and contradictory responses to their questions. Mr. Rogers said the committee was concerned that the companies were extensions of the Chinese government because they were so heavily financed by it.

He said the companies had been told to tell the Chinese government to “stop hacking” into American companies and infrastructure if they wanted to do business in the United States.

“The world is a changed place,” Mr. Rogers said. “We better have faith and confidence in our network.”

In a statement released at the time scheduled for the start of the committee’s news conference, Huawei condemned the committee’s investigation and report. The company said that it had tried for 11 months to work with the committee, but that the committee had proceeded on a predetermined track anyway.

“Unfortunately, the committee’s report not only ignored our proven track record of network security in the United States and globally, but also paid no attention to the large amount of facts that we have provided,” Huawei said in its statement, later adding that, “the report released by the committee today employs many rumors and speculations to prove nonexistent accusations.”

Huawei has had considerable success in winning large telecommunications contracts in Europe and in emerging markets. But it has had little success in the United States, where politicians have long worried, despite Huawei’s denials, that it might be used for Chinese eavesdropping or other cyberwarfare activities.

The company was founded in 1987 by Ren Zhengfei, a former officer of the People’s Liberation Army and a military technology researcher who has run the company ever since. The company is owned by its employees and, unlike many Chinese corporations, has chosen not to sell shares in Hong Kong or the United States, which would expose it to extensive requirements for financial disclosure.

While the company has begun allowing some of its executives to be interviewed in recent years, particularly its foreign-born executives, Mr. Ren has avoided giving interviews or holding news conferences about his goals and objectives.

ZTE said in a statement on Monday in China that while it had not yet seen the report, it had told the committee in April that it was “China’s most independent, transparent, globally focused publicly traded company.”

The company said that its equipment was “evaluated by an independent U.S. threat assessment laboratory with oversight by U.S. government agencies,” and added that “most or all U.S. telecom equipment is made in China, including that provided by Western vendors.”

At a regularly scheduled news conference in Beijing on Monday before the release of the report in Washington, Hong Lei, a Foreign Ministry spokesman, said that Chinese telecommunications companies conducted themselves “in accordance with the principles of a market economy.” He added that “I hope the United States will respect the facts, abandon prejudice and do more things conducive to China-U.S. economic and trade cooperation, rather than the opposite.”

But some analysts said that the report reflected a broader problem for Chinese industry. Duncan Clark, the chairman of BDA China, a telecommunications consulting firm in Beijing, wrote in an e-mail: “It basically reflects what I think is a growing challenge for Chinese companies as they seek to expand globally: they are bumping into a glass ceiling — how the Chinese government behaves and is perceived internationally.”

Michael S. Schmidt reported from Washington, Keith Bradsher from Hong Kong and Christine Hauser from New York. John Markoff contributed reporting from New York.

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