US & South Asia - Articles

China has America over a Barrel

When terms like mergers and acquisitions find mention in editorials of the People's Daily, it is time to sit up and notice. The CPC mouthpiece was asking Chinese home appliance giant, Haier, to explain its go-slow on the purchase of American home appliances firm Maytag. Earlier, of course, Lenovo had set the ball rolling by bidding successfully for IBM's PC unit in a $1.75 billion deal. And now, the China National Offshore Oil Corporation (CNOOC) is engaged in a tug of war over American energy firm Unocal with another energy giant, ChevronTexaco. If Washington's displeasure over the IBM deal was a warning to the China to restrain itself, the latter seems to have paid little attention. It seems China is not bothered about a possible reaction like the one that followed the Japanese takeover spree in the 1980s.

The $18.5 billion Chinese bid for Unocal - worth about $2 billion more than Chevron's cash and stock offer - is well-calculated and would make CNOOC a diversified oil and gas company with global reserves. Since China's big corporations are answerable to their government, the strategic implications of the deal are obvious. Besides having Asia's largest LNG reserves, Unocal has a pipeline connected to American strategic oil reserves, and the only rare-earths mine in the US. But CNOOC offered to sell these assets, if that was what it took to win the deal and pledged not to take supplies from Unocal American oil and gas reserves and sell them abroad.

While the Chinese state keeps close tabs on how its companies manage their affairs, it does not mean big and small Chinese enterprises are not developing an appetite for grand endeavours. Also, neither state nor private enterprises are afraid to take risks. In fact, the Chinese have been planning the overseas expansions of the top Chinese corporations, for some time now. The People's Daily editorial, in fact, was bold enough to call, "a few years in the red...just normal" for firms. This is a confidence that will take more than the US's Committee on Foreign Investments, textile quotas or currency revaluation to dent and is borne out by the fact that the CNOOC bid is backed by some of the best American PR and financial firms, including those with ties to the Bush administration.

Speaking of such ties also clarifies why there is more than the usual heat being generated in the US government over Unocal. A conflict of interests in the Bush administration is evident. For one, Chevron has connections with Halliburton, which should make a lot of things self-evident. For another, Condoleezza Rice was a Chevron Director from 1991 until 2001, when she became National Security Adviser. Also, for US Vice President Dick Cheney, China's increasing stakes in Central Asian oil resources provide the backdrop to his ties with Chevron. Cheney had negotiated a 900-mile pipeline from its western Kazakhstan oil fields to the Black Sea on behalf of Chevron. However, Chevron later decided to sell its stake in another oil and gas field in northwest Kazakhstan to China National Petroleum Company International (CNPCIL) in October 2003, as it did not fit the company's "long-term strategic objectives". It is unknown what Cheney had to say to that. Nor does it explain the agreement between ChevronTexaco and CNOOC a few days later to supply about $21 billion of LNG to China over 25 years from the Gorgon Australian Gas joint venture, in which it has a 50 per cent stake.

Perhaps, the bipartisan opposition on Capitol Hill to the deal might stem from the fact that Sam Nunn, former Democrat Senator from Georgia, sits on the Board of Directors of Chevron, which now faces losing its bid to its Chinese rival. However, for over two decades, the United States has not blocked acquisitions of energy properties by Saudi Arabia, Venezuela or Russia, among others. Even The New York Times' Paul Krugman has advocated blocking the Chinese bid, warning of a possible "great game" strategy by the Chinese. As another opinion piece in the People's Daily concluded, the CNOOC bid would "test US sincerity for free trade".

Even if Unocal shareholders vote against the Chinese offer or the administration thwarts this deal, Chinese companies are unlikely to stop looking for deals in the US and elsewhere. If Chinese firms have to face foreign competition at home, why shouldn't the same logic apply to the US? Besides, instead of buying American Treasury bonds (the Chinese central bank finances the massive US trade deficit by $1 billion a day), it makes sense for China to diversify its investments.

For Indian policy makers, there is news from the neighbourhood. In June 2005, China's biggest mobile phone operator, China Mobile, made an unsuccessful $1.4 billion bid for control of Pakistan Telecommunication Company, but as a Chinese analyst put it, this was merely testing the waters.