Who’s Afraid of China Inc.?

By Steve Lohr –
WILLIAM A. REINSCH, an avowed free trader, welcomes China’s rising stature in the international economy. After all, he is the president of the National Foreign Trade Council, an organization founded in 1914 to promote an “open world trading system.” Indeed, when he was a senior trade official in the Clinton administration, Mr. Reinsch was chided by some security analysts who said he was being soft on China by placing matters of commerce ahead of national security.

But even Mr. Reinsch is uneasy about China’s attempt to buy Unocal, a midsize American oil company. The outcome of the takeover contest for Unocal is uncertain, and last week its board embraced an improved offer from Chevron. Yet Cnooc, a government-backed Chinese oil company, still has the higher offer – and it could up the ante.
If the Chinese bid proceeds, Mr. Reinsch wants to see a thorough national security review of the deal, one that goes beyond the usual focus on weapons technology to include energy security. “Our Army, Navy and Air Force run on oil,” he explained.
Oil is the ultimate geopolitical commodity – it is “The Prize,” as Daniel Yergin titled his epic history of petroleum and international politics. And even if Cnooc fails to grab Unocal, the pursuit has pushed the two sides of the Chinese challenge together and into the spotlight of public debate. For China is both an engine of economic globalization and an emerging military power. In symbolic shorthand, it is Wal-Mart with an army.
The two sides aren’t neatly divided. But those who focus on economics tend to see partnership, cooperation and reasons for optimism despite tensions, while security experts are more pessimistic and anticipate strategic conflict as the likely future for two political systems that are so different.
In China, there are also two camps – the security hawks and the economic modernists, according to China analysts. The modernists see China joining the United States as the second great economic power of the 21st century, and the two nations sharing the gains from increased trade ties and global growth. The hawks regard that view as naïve, and fret that American policy is to remain the world’s only superpower and to curb China’s rise. So China’s response, the hawks say, is to try to erode United States hegemony and reduce America’s power to hold China down.
Both faces of China have been evident recently. Two weeks ago, a senior Chinese military official, Maj. Gen. Zhu Chenghu, said China should use nuclear weapons against the United States if the American military intervenes in any conflict over Taiwan. Then, bowing to pressure from the United States and other trading partners, China announced last Thursday that it would no longer peg its currency tightly to the dollar. It is a measured step, and it will not do much to moderate China’s huge trade surplus with the United States anytime soon. But the move is a sign of flexibility and accommodation.
“Do we see each other inevitably as antagonists, or do we see a world of globalization from which both sides benefit? That is the big issue,” said Kenneth Lieberthal, a senior official in the National Security Council during the Clinton administration.
“And that framework, one way or another,” added Mr. Lieberthal, a China analyst and a professor at the University of Michigan business school, “will drive an enormous number of policy decisions.”
So that is the China question: Is it an opportunity or a threat? If nothing else, the Cnooc bid for Unocal has shown how unsettled American thinking is on China and how deep the anxieties run, both in matters of national security and trade.
It is easy to dismiss Washington as a hot-air factory, but the scope of the outcry in Congress is significant. Resolutions and legislative proposals, all critical of Cnooc’s takeover bid, have piled up in the House and Senate, from Republicans and Democrats. A resolution presented last month by Representative Richard W. Pombo, a California Republican, declared that permitting the Chinese company to buy Unocal would “threaten to impair the national security of the United States.” It passed, 398 to 15.
Senator Byron Dorgan, a North Dakota Democrat, has drafted three pieces of anti-Cnooc legislation that range from calling for a six-month Congressional inquiry into the bid to a bill that would prohibit the deal. Mr. Dorgan objects to the Chinese move on fair-trade grounds. The Chinese government, he says, would not allow an American company to buy a Chinese oil company. “So why on earth should they be able to buy an American oil company?” Mr. Dorgan said.
Yet the Chinese takeover bid taps into a deeper concern about trade and globalization for Mr. Dorgan. He talks of manufacturing jobs lost to China, intellectual-property pirates in China illegally copying American movies and software, and a trade deficit with China that is rising astronomically with no end in sight. “Trade should be mutually beneficial, and it is certainly not with China,” Mr. Dorgan said.
The tempest in Congress has increased the political risks surrounding the Cnooc bid. At $18.5 billion, the bid remains higher than Chevron’s sweetened offer of $17 billion. But Wall Street analysts say Cnooc will have to go higher to have a chance to win, offering a sizable premium over the Chevron bid to compensate for delays of a government review of the Chinese offer or even the possibility that Washington may block a Chinese deal.
It would be an extreme step, but Congress has the power to “regulate commerce with foreign nations,” under Article I, Section 8 of the Constitution. “My sense is that Congress is not going to stand still for a Cnooc takeover being approved,” said C. Richard D’Amato, chairman of the United States-China Economic and Security Review Commission, an advisory group to Congress. “That is the political reality.”
Cnooc and its advisers misread the political environment in Washington. Fu Chengyu, the Cnooc chairman who earned a graduate degree from the University of Southern California, has said he was surprised by the intensity of political criticism. Cnooc’s path would have been smoother if it had joined with an American oil company as a partner in its bid, an option that was considered briefly but rejected, according to a person close to the company.
The idea, the person said, would have been that the American company would acquire Unocal’s assets in the United States, while Cnooc took the main prize in the deal – Unocal’s offshore natural gas fields in Asia and its expertise in offshore exploration and production. The gas reserves and skill are considered strategic to China’s goal of moving away from coal and generating 20 percent of the nation’s electricity from natural gas by 2020. “It would have been better to have not made this big move a head-on attack, to have linked up with an American partner so the deal would have been less threatening and less a lightning rod for China politics in the United States,” the person said.
Perhaps, but many economists and trade specialists contend that the American angst over the Cnooc bid says more about the United States than it does about China or Cnooc’s tactics. “All this really points to the anxieties about globalization in our own society,” said Clyde V. Prestowitz, a trade official in the Reagan administration and president of the Economic Strategy Institute in Washington. “We are so economically interdependent with China now and we chose that path.”
Washington pushed for China’s integration into the international economy and its entry into the World Trade Organization in 2001. American companies have farmed out much of their manufacturing to Chinese factories. American consumers have been on a Chinese shopping spree for years, buying everything from clothes to computers made there. That is why the United States had a record $162 billion trade deficit with China last year. China sits on $700 billion in foreign exchange reserves, mostly in dollars. It recycles those funds in good part by investing in United States Treasury bonds; that keeps American interest rates low, fueling the real estate boom.
“We handed China the money they are using to try to buy Unocal,” said Mr. Prestowitz, author of a new book on the shift of wealth and power to Asia, “Three Billion New Capitalists” (Basic Books, 2005). “And now we’re telling the Chinese, please keep investing in our bonds but you can’t invest what amounts to a sliver of their surplus in an oil company. That’s really confused and hypocritical on our part.”
Where others see muddle, R. James Woolsey, director of the Central Intelligence Agency in the Clinton administration, sees strategic clarity in challenging the Cnooc bid. Oil is a globally traded commodity, Mr. Woolsey concedes, but it is also a strategic resource in a market that is tightening because of rising demand from fast-growing nations like China and India. That, Mr. Woolsey says, is before one begins thinking of the possible impact of, say, an act of terrorist sabotage in a crucial Middle East oil field.
“China is realistically assuming there may be a shortage of oil,” said Mr. Woolsey, a vice president in the Booz Allen Hamilton consulting firm.
In China, Mr. Woolsey sees a nation with military ambitions to challenge the United States, and a political system with little regard for human rights and free speech. Cnooc, in Mr. Woolsey’s view, is the corporate vehicle of “a Communist dictatorship.”
The Cnooc move, according to Frank Gaffney Jr., a senior Defense Department official in the Reagan administration, is a step to ensure that China has the resources for its overarching national design. “China’s strategy is to supplant the United States as the premier economic power in the world and, should it become necessary, defeat us militarily,” said Mr. Gaffney, president of the Center for Security Policy.
The strategic concern was much narrower at William Blair & Company. Until recently, William Blair, the investment firm in Chicago, was the largest outside shareholder in Cnooc, which is majority-owned by the Chinese government. But William Blair sold off its stake, worth about $160 million, in recent weeks because of worries that Cnooc was behaving too much like a state-owned company and not enough like a capitalist enterprise trying to maximize returns to shareholders, explained David Merjan, a fund manager at the firm.
The pricey bid for Unocal, Mr. Merjan said, raised doubts about how independent Cnooc really was from the Chinese government. “If China is going to sell shares in a company like Cnooc to outside shareholders, it should not be run for the benefit of Chinese economic policy,” Mr. Merjan said.
CNOOC and its pursuit of Unocal, it seems, are part of China’s evolutionary path. Cnooc is playing its hand with plenty of government help, about $7 billion in loans on terms Western oil companies could not hope to get. Accordingly, Cnooc may be willing and able to overpay. Yes, China is hunting for oil and gas assets around the world as a national priority. Still, that is happening in a nation that is drifting steadily toward a market economy, though one with more central control than Americans view as a free-market economy.
The Chinese Communist Party, with 60 million members – more than the population of France – does guide the economy, if less and less over time. “But think of it as the Chinese bureaucratic capitalist party,” said Mr. Lieberthal of the University of Michigan. “It has nothing really to do with Communism.”
Mr. Lieberthal counts himself as among the optimists on China. Globalization, he says, and continued integration of the Chinese and American economies can work to mutual benefit. The spread of middle-class affluence and education across more of the Chinese population should eventually be a force for democratic liberalization, following the pattern of Taiwan and South Korea.
“Am I a hundred percent sure I’m right? No, but that’s the long-term bet I’d make,” Mr. Lieberthal said. “And if you let the pessimists – the people who believe that the U.S. and China will inevitably be enemies – drive policy, then the outcome will be the one they predict.”
Source: NY Times via Herald Tribune