Thread: chinese bid for unocal was killed by political opposition

A Furor Was Built on Many Grudges

By EDMUND L. ANDREWS
Published: August 3, 2005

WASHINGTON, Aug. 2 - The board of Cnooc, the Chinese oil company, had one thing right: its bid to buy an American oil company was killed by political opposition.

Lawmakers in Congress, with tacit support from the Bush administration, managed to raise enough objections to Cnooc's bid for Unocal to make most investors doubt that the deal would ever pass muster in Washington.

But now that Cnooc has decided to abandon its bid, policy analysts and lawmakers said, the tensions between the United States and China that it reflected are not expected to diminish. Indeed, they may well intensify in the months ahead.

"I think a very serious economic clash is probably in the offing this fall," said C. Fred Bergsten, head of the Institute for International Economics, a policy research organization here.

Byron Dorgan, a Democratic senator from North Dakota who was one of the sharpest critics of the Chinese attempt to buy Unocal, argued that the withdrawal "does not change the fact that there are policy questions that have to be answered. When a Chinese government-controlled company tries to buy an American oil company, is it a free-market transaction? The answer is no."

Many economists, while not necessarily disputing that claim, would still say that the political reaction was far out of proportion to the case.

They are particularly dubious about arguments that Cnooc's bid would have jeopardized national security, noting that oil is a globally traded commodity and that Unocal's reserves contributed only about 1 percent of American oil consumption.

But the political acrimony in the United States toward China has been rising on several fronts, and the uproar over Cnooc may have been a way to vent other grudges.

"There was nothing wrong with Cnooc taking over Unocal, and for that reason I didn't oppose the merger," said Senator Charles E. Schumer, a leading critic of China's currency and trade practices. "But the furor over China treating American companies and workers unfairly up and down the line is real. And while it led to an incorrect result in this case, it must be dealt with."

Industry analysts and executives predicted on Tuesday that the uproar over Cnooc was unlikely to be the last of its type.

"I don't think this is a one-time deal," said Frank Vargo, vice president for international economic affairs at the National Association of Manufacturers. Mr. Vargo noted that political leaders became anxious about similar spending sprees by oil-exporting countries in the early 1970's and by Japan in the 1980's.

"China is sitting on $700 billion in foreign reserves and has a lot of money," he said. "They're going to start buying things around the world."

Economic tensions with China are escalating on a number of fronts.

Less than two weeks ago, China attempted to relieve one major source of conflict by announcing that it would stop fixing its currency to the dollar at a rate that had been set in concrete for years. That was welcome news to American officials, who had complained for two years that China's currency was artificially undervalued and created an unfair trade advantage for Chinese exports.

But the tensions on that issue are already reviving. When Chinese leaders announced last week that they were not necessarily raising the value of their currency by more than 2.1 percent, Mr. Schumer and his allies warned that China would have to do more or they would threaten the country with steep tariffs.

By withdrawing on Unocal, Mr. Bergsten said, Cnooc may have removed one source of major conflict that could have dragged on for months.

But the tensions over Chinese corporate takeovers are likely to persist.

Patrick Mulloy, a member of the U.S-China Economic and Security Review Commission, a bipartisan advisory panel created by Congress, said Cnooc's withdrawal would force American policy makers to look at issues posed by government-owned companies.

"This is good news," Mr. Mulloy said of Cnooc's decision. "Don't call this a commercial transaction when it's not a commercial transaction. This is a government-controlled company. There was no ability for an American company to buy Cnooc; there was no reciprocity."

The political uproar began almost immediately. On June 30, the House passed two contradictory resolutions - one that demanded a "thorough review" of the potential dangers to national security, and a second that would have flatly prohibited the Treasury Department from recommending approval.

Those did not become law. But last week, House and Senate conferees added an amendment to the energy bill, which did pass both chambers, that ordered the Energy Department to conduct a four-month review of the deal before reaching a decision.

The amendment would have delayed any government decision by about seven weeks, increasing shareholder uncertainty over whether a Cnooc takeover would win approval.

The prospect of political hostility toward Chinese corporate takeovers worries many trade specialists, who fear it would encourage China and other countries to discriminate against American investors.

"The United States has argued persistently over the course of two decades that governments should not interfere with the ability of companies to invest," said Charlene Barshefsky, who served as United States trade representative under President Bill Clinton. "The concern I have is not only about the severe damage this does to the strength of our position abroad, but about the taking of mirror actions by other countries - and not only China."

Philip Swagel, a resident scholar at the American Enterprise Institute and a former chief of staff on President Bush's Council of Economic Advisers, said Americans were in danger of losing perspective, thinking that the economic competition between nations should somehow be seen in military terms.

Mr. Swagel pointed out that two American banks were interested in buying stakes in state-owned banks in China. While those bids have been encouraged by Beijing, it is doubtful that Washington would be so inviting of similar deals, particularly if they involved changes in control.

"Imagine if a Chinese company tried to take over Citigroup," Mr. Swagel said. "It would go to Defcon 5 here."

"Imagine if a Chinese company tried to take over Citigroup," Mr. Swagel said. "It would go to Defcon 5 here."

Does anyone know what Defcon 5 means?

I think it's great the Chinese backed off. I commend the shareholders of UNOCAL and EXXON for doing the right thing.

If I were CNOOC, I'd just sit back too and wait untl the merger goes through between UNOCAL and EXXON, then buy the whole thing.

TWO OIL COMPANIES is better than ONE any day, right China?

Originally Posted by Judy

I think it's great the Chinese backed off. I commend the shareholders of UNOCAL and EXXON for doing the right thing.

If I were CNOOC, I'd just sit back too and wait untl the merger goes through between UNOCAL and EXXON, then buy the whole thing.

TWO OIL COMPANIES is better than ONE any day, right China?

Yeah China is not backing off anything, I would bet my life on that. There just going to come in the open back door.

I just wish I could post some of the Pics of my wife's hometown of Karamay China. Her home town was founded because of Oil and it the only place in the world I have seen Oil, bubbling out of the ground. And I'm not just saying that it really does come out of the ground without pumping it. but outside her town, there is millions of oil wells and one of the largest refineries you will ever see and I have seen a lot of them in my travels.

China might have backed off UNOCAL but it owns our nations debt and our nation -- I just hope they don't decide to call it in .