The foreign hostile government can't legally do anything to me based on the information it gains. At worst it can blackmail me or abuse access to accounts, at which point I'll have the protection of my government.
The domestic government can do a lot of damage with the information it gains and importantly, I have little to no recourse. If it makes up an excuse to seize my funds, I can't really do anything. If a three-letter agency blackmails me into doing something, who's going to protect me?
They're both bad but a foreign government spying on me is less bad than a domestic one.
A bit off topic but it sounded like you were implying that domestic was less bad. I believe the reverse.
It may not be xenophobia, it might just be plain paranoia, either way there is some public diplomacy going on that is carefully crafted to get people to fear the 'enemy' hacking everything. Why attribute everything to malice? Ultimately there is good money to be made in selling routers particularly if you can get a municipality to spend proper money on providing connectivity for a city sized area. Huawei might not be a front for the Chinese army, they could be wanting to make profit from a legitimate product. They know full too well that any backdoor specials could compromise their entire business model to lose all of their contracts to put themselves out of business. Why would they run that risk?
Cui bono applies, by making accusations NSA/GCHQ can get them out of the market so that the only option for customers is to buy equipment that is hackable by them.
As neither a US nor Chinese citizen I don't see the big deal. Who cares if the US or Chinese government steals all your secrets