‘China Will Take Hostages’: Huawei CFO Arrest Grabs Top Billing For Nervous Markets

It looks as though the Huawei Technologies story has the potential to do some serious damage to sentiment.

While we would caution that it’s too early to draw conclusions about whether and to what extent the news will seriously undermine U.S.-China relations barely five days on from the tentative trade truce struck in Argentina, we’d be remiss not to note that this kind of thing has a way of becoming self-fulfilling when markets are already on edge.

That is, two ostensibly unrelated events can end up becoming inextricably intertwined simply because enough people start to believe that they actually were related.

U.S. equity futures crashed out of the gate on Wednesday evening and it was by no means clear that the dramatic gap lower was entirely (or even partially) attributable to news that Canada has arrested Huawei Technologies CFO Wanzhou Meng, who now faces extradition to the U.S. in connection with allegedly running afoul of U.S. sanctions on Iran.

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The Globe and Mail initially reported the story and to be clear, nobody read it and thought “oh, this is great news!” It’s obviously not great news under the circumstances and considering the precedent. Huawei has of course been at the center of an ongoing national security debate in the U.S. since 2016 and the company has run into similar concerns in other locales.

The situation is fluid and you might recall that late last month, the Wall Street Journal reported that the U.S. government is engaged in an apparently aggressive lobbying effort to convince allies not to use the company’s telecom equipment.

In addition to conjuring memories of the ZTE saga, this also makes it abundantly clear that the U.S. still has Huawei squarely in the crosshairs and that isn’t likely to please Beijing.

“Huawei is one of the Chinese government’s pet companies,” James Lewis, a former Commerce Department official who worked on Chinese high tech policy told Axios on Thursday, adding the following:

They will retaliate and China will take hostages. If I was an American tech executive, I wouldn’t travel to China this week.

That sounds pretty ominous. And so does this from T.J. Pempel, a PoliSci professor at the University of California, Berkeley who spoke to The New York Times:

The arrest of a family member linked to Huawei’s founder indicates how the tension between the two sides is rapidly escalating.

Pempel specializes in East Asian politics and economy.

The punchline here is that while Huawei equipment is banned in multiple countries, Canada actually isn’t one of them. “[Huawei] has long posed a serious risk to U.S. national security, and I continue to strongly urge Canada to reconsider Huawei’s inclusion in any aspect of its 5G development, introduction, and maintenance,” Marco Rubio said, in an e-mail to Axios.

Getting back to the market implications, the worry is that while the initial knee-jerk lower in U.S. equity futures might not have had much to do with the Huawei news, the fact that the story has now been widely cited as a possible contributing factor (including by us) could cause traders to pull back or, worse, turn bearish.

That’s what we meant above when we said that “two ostensibly unrelated events can end up becoming inextricably intertwined simply because enough people start to believe that they actually were related.”

Of course just because the Huawei news didn’t “cause” futures to crash doesn’t mean it doesn’t have implications for markets.

It’s hard to imagine that the U.S. would take such a dramatic step without considering the ramifications for the fledging trade truce. Press departments for the DoJ and the U.S. Attorney’s Office in the Eastern District of New York (where Meng faces “unspecified” charges) declined comment to the Times and other media outlets.

Asked by the Times whether Trump was apprised of this situation while he was literally sitting across the table from Xi in Buenos Aires, The White House did not immediately respond.

I suppose we’ll have to wait on the official word, which will likely emanate from “Tariff Man’s” Twitter feed.