Mr Unpredictable: Donald Trump and ZTE

Chinese technology company ZTE Corp appears to have been saved from the brink, after US President Donald Trump’s surprising intervention on Twitter. But although that may look like good news to ZTE’s investors, it should not be applauded by anyone else. The only thing predictable about the trade war between China and the US is quite how unpredictable it will be.

  • By Morgan Davis
  • 15 May 2018
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There are few things more erratic than Donald Trump’s Twitter account. On May 13, a few hours after sending out a Mother’s Day message, and a few hours before criticising Iran for ‘trying to take over the Middle East by any means necessary’, Trump tweeted about a Chinese technology firm that he had probably not even heard of a few weeks before.

US officials had accused ZTE of violating sanctions against Iran and North Korea, and subsequently lying about it. As punishment the company was cut off from US suppliers, effectively shuttering its business operations, halting trading of the company’s shares, and causing a covenant breach of ZTE’s loan. But then Trump got involved.

“President Xi of China, and I, are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast,” he wrote. “Too many jobs in China lost. Commerce Department has been instructed to get it done!”

Good news? Not so fast. The message of the ZTE story isn’t that investors should not worry about the US threats as they will only be reversed. Instead, it is how thin the lines have come between action and inaction, reprimand and reward, friendship and tension. It is by now no surprise to anyone that Trump is unpredictable.

The last time a Republican was in the White House, the term ‘unknown unknowns’ gained currency. For Donald Trump, the more appropriate expression is ‘unpredictable unpredictability’.

Trump’s outlandish behaviour is often unpredictable, but at least it usually fits a pattern – often a pattern of foot firmly meeting mouth. But with his latest attempt to calm fears of a trade war rather than stoke them Trump has displayed how unpredictable his unpredictability really is.

It is not for this column to judge whether ZTE deserved its reprimand from the US government but the move appeared to tick every box Trump likes: a blow against China, a moment of economic populism, and a snarl at Iran and North Korea. Now, all of a sudden, he has tried to reverse course.

How should investors prepare for this level of unpredictability? Can any due diligence take into account geopolitical risk at this moment? Investors need to be conscious of whether a company has been under fire in the US, be it in Congress or through the honourable medium of the tweet. They should account for a company’s global ties, as well as its exposure to the US-China trade war. But after all that, will they still have any idea how to price the thing?

ZTE isn’t the only company that has faced US criticism recently. At the end of April, compatriot tech company Huawei also found itself in a crunch as the US Department of Justice announced an investigation into Huawei’s alleged violations of US sanctions, the same day the company was trying to sell a new euro-denominated bond. Huawei ended up pulling the deal as a result of the announcement, but expressed optimism that it would be able to come back to the market later this year for another trade. Perhaps it will without any problems. But investors should be wary.

The ZTE saga is far from over. Will Trump’s tweet spare ZTE? Will other Chinese firms get a softer treatment? Will the move lead to calmer dialogue between China and the US? Will Donald Trump abandon Twitter, adopt a detail-oriented leadership style and become a voice of reason and hope in the global economy?

Only one of those questions is easy to answer with any certainty.  

  • By Morgan Davis
  • 15 May 2018

Panda Bonds Top Arrangers

Rank Arranger Share % by Volume
1 China Merchants Securities Co 17.33
2 Industrial and Commercial Bank of China (ICBC) 14.45
3 CITIC Securities 10.36
4 Agricultural Bank of China (ABC) 9.42
5 China CITIC Bank Corp 8.48

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Rank Lead Manager Amount $m No of issues Share %
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1 Goldman Sachs 15,658.50 72 7.61%
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Rank Lead Manager Amount $m No of issues Share %
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1 HSBC 21,505.44 181 7.68%
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3 JPMorgan 13,802.40 85 4.93%
4 Bank of America Merrill Lynch 12,328.25 77 4.40%
5 Goldman Sachs 11,208.75 54 4.00%

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