House Intelligence Committee says US companies should avoid doing business with China’s two leading technology firms.

A US House Intelligence Committee has warned that US companies should avoid doing business with China’s two leading technology firms because they pose a national security threat to the country.

The panel, in a report to be issued on Monday, says US regulators should block mergers and acquisitions by Huawei Technologies Ltd and ZTE Corp, who are among the world’s leading suppliers of telecommunications equipment.

Reflecting US concern over cyber-attacks traced to China, the report also recommends that US government computer systems not include any components from the two companies because that could pose an espionage risk.

“China has the means, opportunity, and motive to use telecommunications companies for malicious purposes,” the report says.

“The investigation concludes that the risks associated with Huawei’s and ZTE’s provision of equipment to US critical infrastructure could undermine core US national-security interests.”

The recommendations are the result of a year-long probe, including a congressional hearing last month in which senior Chinese executives of both companies testified, and denied posing a security threat.

A US executive of one of the companies said the firm co-operated with investigators, and defended its business record.

Huawei is a “globally trusted and respected company,” William Plummer, vice president for external affairs, said.

The bipartisan report is likely to become fodder for a presidential campaign in which the candidates have been competing in their readiness to clamp down on Chinese trade violations.

‘Currency manipulator’

Republican presidential candidate Mitt Romney, in particular, has made it a key point to get tougher on China by designating it a currency manipulator and fighting abuses such as intellectual property theft.

The committee made the draft available to reporters in advance of its public release, but only under the condition that they not publish stories until the broadcast on Sunday of a CBS “60 Minutes” report on Huawei.

In the CBS report, the committee’s chairman, Republican Mike Rogers, urges US companies not to do business with Huawei.

The panel’s recommendations are likely to hamper Huawei and ZTE’s ambitions to expand their business in the US.

The companies’ products are used in scores of countries, including in the West, and both deny being influenced by China’s communist government.

The report says the committee received information from industry experts and current and former Huawei employees suggesting that Huawei, in particular, may be violating US laws.

It says that the committee will refer the allegations to the US government for further review and possible

investigation.

Bribery allegations

The report mentions allegations of immigration violations, bribery and corruption, and of a “pattern and practice” of Huawei using pirated software in its US facilities.

Huawei is a private company founded by a former Chinese military engineer, and has grown rapidly to become the world’s second largest supplier of telecommunications equipment, operating in more than 140 countries.

ZTE Corp is the world’s fourth largest mobile phone manufacturer, with 90,000 employees worldwide.

While their business in selling mobile devices has grown in the US, espionage fears have limited the companies from moving into network infrastructure.

The report says the companies failed to provide responsive answers about their relationships and support by the Chinese government, and detailed information about their operations in the US.

It says Huawei, in particular, failed to provide thorough information, including on its corporate structure, history, financial arrangements and management.

“The committee finds that the companies failed to provide evidence that would satisfy any fair and full investigation. Although this alone does not prove wrongdoing, it factors into the committee’s conclusions,” the report says.

‘Political distraction’

In Washington, Huawei executive Plummer said on Friday that the company co-operated in good faith with the investigation, which he said had not been objective and amounted to a “political distraction” from cyber-security problems facing the entire industry.

All major telecommunications firms, including those in the West, develop and manufacture equipment in China and overlapping supply chains require industry-wide solutions, he added. Singling out China-based firms would not help.

Plummer complained that the volume of information sought by the committee was unreasonable, and that it had demanded some proprietary business information that “no responsible company” would provide.

In justifying its scrutiny of the Chinese companies, the committee contended that Chinese intelligence services, as well as private companies and other entities, often recruit those with direct access to corporate networks to steal trade secrets and other sensitive proprietary data.

It warned that malicious hardware or software implants in Chinese-manufactured telecommunications components and systems headed for US customers could allow Beijing to shut down or degrade critical national security systems in a time of crisis or war.

The committee concluded that Huawei likely has substantially benefited from the support of the Chinese government.

Huawei denies being financed to undertake research and development for the Chinese military, but the committee says it has received internal Huawei documentation from former employees showing the company provides special network services to an entity alleged to be an elite cyber-warfare unit within the People’s Liberation Army.