Markets can be erratic beasts, as indicative of collective neuroses as collective wisdom. But it is not surprising that they reacted to Wednesday’s thunderbolt. Much remains unclear about Canada’s arrest of a powerful executive from Chinese telecoms behemoth Huawei at the request of the US. Whatever precisely happened, and however this plays out, it is a dramatic course of action against a company at the heart of Chinese technology ambitions – and the pushback against them. It comes in the midst of a trade war with the US and broader security fears about Chinese firms.

Huawei is the world’s largest telecoms equipment provider, and its second largest mobile phone manufacturer: it is a pillar of the Chinese economy. Its founder Ren Zhengfei is a former military officer; the arrested executive, Meng Wanzhou, is his daughter.

Note also the timing. She was arrested on 1 December: the day Xi Jinping and Donald Trump sat down to dinner in Buenos Aires. No one in China will see this as anything other than intensely political, whatever the truth of the matter. Diplomats have demanded her release and say she has broken no laws.

Reports say the arrest relates to allegations that Huawei has breached US sanctions on exports to Iran; US prosecutors began an investigation two years ago. Last year, ZTE, another Chinese telecoms firm, pleaded guilty to sanctions violations. A devastating US ban on the sale of parts and software to the firm was downgraded to an $892m fine and monitoring after Mr Trump’s intervention. No one was detained that time. So why an arrest, why her and why now?

In the background is intense and growing suspicion towards Huawei and other Chinese firms, which they say is unmerited. Western intelligence officials have repeatedly raised concerns about Huawei’s involvement in infrastructure.

Now New Zealand and Australia have joined the US in barring Chinese equipment in the rollout of 5G networks, and Washington is lobbying other allies to do the same. The issue is especially pointed for the remaining members of the “Five Eyes” intelligence alliance, Canada and the UK. The day before the arrest became public, Canada’s top spy warned of the risks of state-sponsored espionage in areas such as 5G mobile networks. Earlier this week, MI6 chief Alex Younger said the UK needed to decide how comfortable it was with Chinese ownership of technologies being used. Foreign firms will not be involved in China’s 5G network.

Market nerves were driven by the assumption that this arrest could rattle the current, fragile trade truce – though China wants a deal and has now said it will immediately implement agreed measures. Whatever the fallout and longer-term outcomes, Huawei’s travails and the trade dispute reflect broad and growing western concerns about China’s increasing international might, and how it does and will exercise it.