People try out ZTE mobile phones on day two of the Mobile World Congress (MWC) Shanghai 2019 at the Shanghai New International Expo Center on June 27, 2019 in Shanghai, China.

Japanese bank Nomura downgraded Chinese telecommunications firm ZTE, saying there would be a temporary slowdown in demand as the shift to 5G equipment has not fully picked up.

It also warned of a risk of escalation in the conflict between the U.S. and China in the tech sector.

In a report on Tuesday, Nomura downgraded Hong Kong-listed ZTE shares from a "buy" rating to "neutral."

"The investment cycle for the 4G network has almost come to an end, but demand for 5G base stations has not yet fully picked up, which we think is partially owing to high component cost and immature technology," it said.

Nomura highlighted key risks for the company that include "slower-than-expected 5G infrastructure spending by operators."

ZTE's major customers include the three state-run Chinese telcos — China Telecom, China Unicom and China Mobile. 5G licenses have been awarded to the three operators, which are now racing to roll out 5G services across China.

Nomura also cut its 2019 revenue forecast for ZTE by between 2% and 7%, taking into account slower-than-expected demand.