Congress may have been able to stop CNOOC from buying Unocal, but expect Chinese companies to continue to try to buy up U.S. companies. After all, they have to do something with all the dollars we’re sending them. But unlike a similar shopping spree touched off by a U.S. trade imbalance with Japan in the 1980s, this time around China and the U.S. could be headed for a strategic tug-of-war over global national resources, top management talent and technology.
China’s efforts to acquire U.S. companies have been on the rise for years. Last month, Chinese appliance maker Haier dropped a $1.28 billion bid to buy U.S. appliance maker Maytag. The move followed the successful $1.75 billion bid late last year of IBM’s PC division by Chinese computer maker Lenova.
But with crude prices hitting new records, it was an $18.5 billion bid by state-run oil company CNOOC to buy U.S. oil company Unocal that touched off a nasty political backlash and prompted Congress to successfully block the takeover.
"The political reaction has scared off the board of Unocal, the shareholders and CNOOC itself," said Edmund Harris, fund manager at Guinness Atkinson, which holds CNOOC shares. "I don't think anybody really anticipated quite what a maelstrom they were entering into."
Underlying U.S. opposition to China’s Unocal was the fear that greater control over Asian oil and gas supplies would increase Beijing’s leverage in the region. Recent talks between President Bush and India about military and nuclear cooperation were seen by some observers as a shot across China’s bow. If both sides continue to regard the other as a threat, that will likely lead to more protectionism in the U.S., according to Ian Bremmer, president of the research and consulting firm Eurasia Group President.
“There is some strategic competition which is surfacing between the United States and China,” he told CNBC. “The real risk is not that there’s going to be a hard (economic) landing, as Wall Street analysts have talked about for the last couple years, but that continued very strong Chinese growth leads to greater conflict between the United States and China."
Even as Congress and the White House were lowering trade barriers this week with the signing of the Central American Free Trade Agreement, CNOOC's bid for Unocal had already sparked an effort to build an economic Great Wall around the U.S. to turn back the Chinese invaders. Bi-partisan opposition to CNOOC’s bid spawned a provision to the recently enacted energy bill that all but doomed the deal.
“This was a perfect storm,” said Bremmer. “Democrats and Republicans together all seeing the opportunity to beat up on the Chinese. The talk was about fact that you don't have a fair openness for American investors into the Chinese market. And that this isn't a player that is going to allow the free market mechanism to reign in terms of what they are doing with their own economy.”
But the forces driving China’s shopping spree for foreign assets show no signs of letting up. China’s economy grew at an annual rate of 9.5 percent in the second quarter –- nearly three times as fast as the U.S. economy. To satisfy increased demand for the raw materials needed to fuel that growth, China has to look outside its borders for everything from crude oil to scrap steel.
Trade imbalances
China’s rapid growth has also created a huge trade imbalance with the U.S., and America’s appetite for cheap Chinese-made goods shows no signs of slowing. The growing surplus of dollars American consumers send to China to buy all those goods is piling up. So far, China has recycled most of that money by buying some $700 billion in U.S. Treasuries, helping to keep U.S. interest rates low.
Now, China is beginning to use those surplus dollars to try to buy up hard assets like U.S. companies. U.S. firms aren't the only ones on China’s shopping list. Chinese consumer electronics maker TCL last year bought a piece of France’s Thomson electronics in 2004 and recently bought out Alcatel’s stake in a joint-venture phone business, for example.
And the tightening of economic ties between China and the U.S. has not been a one-way street -- U.S. and other global multinationals have been buying stake in Chinese companies for at least the past decade. Last year, Anheuser Busch paid $700 million to buy Chinese brewer Harbin after its 2002 purchase of a 27 percent stake in China’s largest brewer Tsingtao. U.S. photo giant Kodak paid $100 million for a 20 percent stake in China’s Lucky Film Corp.
But opponents of China’s Unocal bid, led by rival bidder Chevron Corp., successful argued before Congress that it wasn’t a fair fight because China was subsidizing the bid with low-interest loans. They also argued that China’s state-managed economy unfairly restricts foreign investment in Chinese firms.
“China likely wouldn't allow an American company to buy a similarly situated Chinese company,” said Sen. Charles Schumer, D-N.Y., after the announcement that CNOOC had dropped its bid for Unocal. Though he said he saw nothing wrong with the deal, “If China were open to American companies buying Chinese companies, I think CNOOC would have had a much easier time of it."
Even if China faces future opposition to buying up American resources, it is busy shopping elsewhere in the world. Last November, Chinese President Hu Jintao told the Brazilian Congress that China would invest $100 billion across the region within a decade and signed 39 commercial deals for Chilean copper, Argentine beef and Cuban nickel.