Huawei and ZTE have been officially cited by European Union for violation of anti-dumping and anti-subsidy guidelines.
The Chinese telecommunications equipment makers could be subject to a formal inquiry to investigate anti-competitive behavior which is affecting European markets, according to Reuters.
European Union Trade Commissioner Karel De Gucht said that the investigation is necessary to protect a "strategic" sector of the European economy. Reference to the two firms comes before global talks expected to begin in July, where the EU will engage in negotiations with the United States to create a free trade pact.
China is second only to the U.S. as critical trading partners with Europe.
De Gucht told the publication that "Huawei and ZTE are dumping their products on the European market," and Chinese state support -- resulting in cheap capital -- creates a "distorted playing field" which can only do European competitors harm.
European telecom equipment makers have not made official complaints against their Chinese rivals, and so if the investigation goes ahead, it will be on the European Commission's own initiative, also known as ex-officio.
Chinese exports to the 27-member bloc totaled $372 billion last year.
In an emailed statement, Huawei denied breaking European laws, commenting that the firm "always plays fair and we win business and trust from our customers through our innovative technology and quality service, rather than via pricing or subsidies."
The official China Daily quoted Tao Jingwen, the president of Huawei Technologies Co Ltd in the West Europe Region, who said that the EU should not be judgemental of Chinese firms. The executive denies that Huawei receives government subsidies in order to flood markets with cheap products, and the company will take "strong action" if an investigation is launched.
In addition, Jingwen told the publication that innovation, not subsidies, is critical in order to keep customers -- and if European companies blame China for financial losses, it is "sometimes caused by their own laziness."
An investigation is ready to launch but has been put on hold, giving Europe and China time to come together for a solution before moving down the route of potential sanctions.