Is the bid by the China National Offshore Oil Corp. for
the American oil company Unocal another act in a classical tragedy
that will lead inexorably to the United States and China destroying
the commercial embrace they both cherish?
From a political
perspective, the bid could scarcely have come at a less opportune
time. It is destined to rile many in a U.S. Congress already
fretting over trade issues and the Chinese currency peg. It will be
another boost to those calling for punitive tariffs against all
Chinese goods. From an overall Chinese perspective, the bid could be
Yet there is also a
compelling logic to it. The cash offer of $18.5 billion looks huge
enough but it amounts to little more than one month's addition to
China's foreign exchange reserves at the rate of accumulation seen
over the past year. Where else is China supposed to put its pile of
dollars? Into yet more of the low yielding debt paper of Fannie Mae
and the other agencies fueling America's housing bubble?
Paying a fancy price for
Unocal may be a less dumb investment than buying U.S. debt and
helping keeping alive the cheap money era that Alan Greenspan has
perpetuated as chairman of the Federal Reserve. At least China gets
real assets, not increasingly dubious promises to pay secured on
ever more lenient mortgage loans to sub-prime U.S. household
Having been encouraged
to join the global capitalist system, China naturally feels that it
has as much right to buy a U.S. oil company as an Indonesian gas
field or an Australian mining company.
And from the perspective
of the Unocal shareholders, it looks a good deal too. Who else but
China is so flush with cash that they are prepared to outbid the
multinational oil giants, in this case Chevron? "Take the money and
run," might be the best advice, just as it was when IBM sold its
personal computer business to China's Lenovo or U.S. investors
unloaded iconic real estate such as the Rockefeller Center to
over-eager Japanese buyers in the late 1980s. Such purchases of
overseas assets at inflated prices added to the problems Japan faced
when its own asset bubble burst in 1990.
But if the reaction of
many Americans to the bid confounds their own capitalist principles,
Beijing also needs to remember the contradictions of its own
position. To finance its bid, China National Offshore Oil Corp., or
CNOOC, will have to leverage itself to an approximate 50:50
debt-to-equity ratio - a very high level for a resources company,
particularly in a sector with such price volatility.
Such leverage is only
possible because CNOOC is a government-controlled state enterprise.
The ability of such companies to borrow almost as much as they
please explains the problems of China's state banking system and
illustrates how far China has to go to reach U.S. concepts of
Lurking in the
background, too, is the fact that China's dollar hoard stems at
least in part from its refusal to submit its currency even to modest
amounts of market force. While its system remains so different,
China cannot be expect to be treated as would a bidder from Europe
The Unocal issue cannot
be separated from the wider issue of U.S.-China trade imbalances.
The assumption that the relationship will endure because the two are
dependent on each other - the United States on Chinese savings,
China on the U.S. consumer - is dangerous. To the divisions over
trade and currency are now being added the even more emotional
issues of ownership and national security. In the real world, there
is a difference between China's ownership of Unocal and Fannie Mae
The only way to avoid
these problems going from bad to worse is to address not the
symptoms but the macroeconomic origins. Thanks to Greenspan, money
is absurdly cheap in the United States, hence the alarmingly low
household savings rate, rising indebtedness and buoyant consumer
demand. And money is cheap in China, too, as it pegs its currency
and its interest rates to Greenspan's policies, in the process
creating growth led by excess investment - not least by state
enterprises - and unsustainable export expectations.
Can China and America
grasp these fundamental causes before the symptoms overwhelm them?
That, not the fate of Unocal, is the issue both countries have to
face if their commercial entente is to survive.