Bogus fears send the Chinese packing

Aug 2nd 2005
From The Economist Global Agenda

CNOOC, a Chinese state-controlled oil firm, has abandoned its $18.5 billion bid for Unocal, blaming political opposition in America. China’s government could retaliate by blocking American investment in China. American firms may, in the long run, be glad of that

FU CHENGYU, chairman and chief executive of China National Offshore Oil Corporation (CNOOC), did all he could to make his firm appear like a western, commercially-minded enterprise in its pursuit of Unocal. But on Tuesday August 2nd, Mr Fu pulled the plug on CNOOC’s $18.5 billion bid for America’s eighth-largest oil firm. This leaves the way open for Chevron, America’s second-largest oil company, to pursue its own $17 billion offer for Unocal.

Despite its reputation as one of China’s best-managed companies and the presence on its board of two respected non-Chinese businessmen—Evert Henkes, formerly of Shell, and Kenneth Courtis of Goldman Sachs—CNOOC’s bid for Unocal met with considerable hostility from American politicians. Indeed, in explaining the decision to abandon its bid, the Chinese company said that it had “given active consideration to further improving the terms of its offer, and would have done so but for the political environment in the US.”

Not even CNOOC’s promise to preserve American jobs could prevent a wave of criticism across Washington, which centred on the perceived threat to national security of placing precious energy reserves (albeit located largely in Asia) in the hands of a firm that, despite its semblance of westernisation, is still linked to China’s communist government. The political resistance to CNOOC’s bid culminated in the insertion into an energy bill of a clause requiring a four-month study of China’s energy policy before the bid could continue—a move that would, in effect, force CNOOC to raise its offer to compensate investors for the delay. But the company insisted it would not countenance paying more “just because we’re Chinese”. The final nail in the coffin may have been the decision by Institutional Shareholder Services, an influential advisory group, to recommend Chevron’s lower offer, citing the opposition to CNOOC’s bid and the risks associated with it.

When CNOOC launched its bid in April, it seemed to confirm a trend: Chinese companies were on a buying spree. Shortly before, Haier, a white-goods manufacturer, had launched its own bid for a slice of American business, offering $2.25 billion for Maytag (though it pulled out last month after Whirlpool countered). And in May, Lenovo, a firm with strong connections to China’s government, had finalised its purchase of the PC-making arm of IBM.

These and other deals have clear backing from Beijing. China’s government is intent on creating up to 50 state-controlled “global champions” to cement the place of the country’s businesses among the world’s best and maintain China’s rapid rate of economic growth. It hopes to achieve this both through the acquisition of natural resources and of western brands, management skills and access to international markets, while cutting costs by moving manufacturing jobs to mainland China. Firms that are directly or indirectly state-owned have access to the vast resources of the Chinese state. Even those that are nominally independent can obtain loans that are virtually interest-free from state-owned banks.

American politicians made much of the fact that CNOOC was able to trump Chevron’s offer with a cash bid because $7 billion would come directly from China’s government and another $6 billion would come in the form of low-interest loans from state banks. This partly explains why CNOOC could afford to preserve American jobs while Chevron has promised cost savings of some $325m from the merger (inevitably including job losses). Congress’s objections to the subsidising of American employment by China’s government are hard to fathom. So too are fears that American interests would be damaged if China gained access to a limited amount of oil and gas reserves (Unocal is not even one the world’s top 40 oil companies). For all the talk of securing energy reserves, China would still be as exposed to the movement of oil prices on the world’s energy markets as any other country.

American politicians’ objections to the deal echo those heard in the 1980s, when Japan embarked on a buying spree of American assets. Then, too, congressmen spread misguided fears of excessive foreign control and national-security threats. Yet, in recent years, acquisitions of American energy-related assets by state-owned oil firms such as Saudi Arabia’s Aramco and Venezuela’s PDVSA failed to elicit so much as a murmur. In the case of CNOOC, some may have seen an opportunity to repay China for the “unfair” competition that America blames for its huge trade deficit. On July 21st, China tried to allay some of the criticism by revaluing the yuan slightly and switching its peg from the dollar to a basket of currencies.

At the time of the Japanese invasion, America’s Congress considered a number of bills to curtail foreign investment. Ronald Reagan introduced the notorious “voluntary export restraints” on Japanese steel and cars. He also abandoned America’s laisser-faire approach to currency markets and, through the Plaza Agreement, engineered a sharp drop in the dollar. But the widely predicted Japanese conquest of American business failed to materialise, largely because the investments were ill-considered. Chinese firms are likely to continue chasing American assets despite CNOOC’s failure. American investors should make the most of it while they are still prepared to overpay.

By denying China access to energy assets through legitimate means, America might expose itself to bigger threats. Some think that China might now seek energy security more aggressively, for instance by competing more directly for access to the oil and gas from Russia and Central Asia that the West so prizes. And the Chinese government may retaliate by blocking American investment in China. No other country attracts as much foreign direct investment: in 2004, around $60 billion poured into China as firms raced to grab a slice of its huge untapped market.

Foreign multinationals may not like to mention it, but doing business in China is far from easy—and often not very profitable. The country’s bureaucracy is mystifying, its maze of regulations ever-changing. In addition, Chinese officials generally consider that foreign firms deserve little in return for their investments. And compounding all this is the difficulty of finding trustworthy local business partners. So perhaps America’s firms would, eventually, have reason to thank Beijing for turning them away.

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