Tuesday, July 5, 2005

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Gonna be a fun takeover battle

Peter S. Goodman reports in the Washington Post that the Chinese Foreign Ministry hasn't taken too kindly to Congressional doubts about the proposed CNOCC takeover of Unocal:

The Chinese government on Monday sharply criticized the United States for threatening to erect barriers aimed at preventing the attempted takeover of the American oil company Unocal Corp. by one of China's three largest energy firms, CNOOC Ltd.

Four days after the House of Representatives overwhelmingly approved a resolution urging the Bush administration to block the proposed transaction as a threat to national security, China's Foreign Ministry excoriated Congress for injecting politics into what it characterized as a standard business matter.

"We demand that the U.S. Congress correct its mistaken ways of politicizing economic and trade issues and stop interfering in the normal commercial exchanges between enterprises of the two countries," the Foreign Ministry said in a written statement. "CNOOC's bid to take over the U.S. Unocal company is a normal commercial activity between enterprises and should not fall victim to political interference. The development of economic and trade cooperation between China and the United States conforms to the interests of both sides." (emphasis added)

Look, I'm probably more sympathetic to the proposed takeover than most Americans, but that highlighted passage even made me laugh out loud. As the Economist pointed out two weekso ago, 70.6% of CNOOC's stock is owned by a "state-owned, unlisted parent company." Furthermore, "The Chinese offer is in cash—the shares even of a well-run Chinese firm are not yet acceptable as takeover currency." A separate story points out:

The Chinese government’s coddling of its state-owned firms is another force behind the current wave of overseas expansion. While officials want to see markets develop at home, up to a point, they fear the fallout from the collapse of hundreds of large, communist-era basket-cases. So the government props these enterprises up with ultra-cheap loans through the banking system and other favours, which have the effect of creating overcapacity and nurturing unfair competition. This, in turn, pushes the more successful state firms, and private companies like Haier, to seek opportunities in markets abroad.

China’s favoured companies, with their access to cut-price funding, will usually be at an advantage compared with overseas rivals when bidding for assets, and may be prepared to pay over the odds. Critics suggest that CNOOC is paying too high a price for Unocal and that the money is coming from China’s government, which has let its desire to create global businesses cloud commercial logic. CNOOC has said it will borrow $16 billion from its government-owned parent and banks to finance the offer.

There's nothing "normal" about this particular commercial exchange -- from the Chinese side of things, there is government intervention all over the friggin' place. The Chinese government's suggestion otherwise just makes them look ham-handed.

The irony, of course, is that regardless of the Chinese government's idiocy, the Congressional concerns about the takeover are pretty much bogus. Goodman's story quotes Rep. William J. Jefferson, a Louisiana Democrat, saying last week that, "We cannot, in my opinion, afford to have a major U.S. energy supplier controlled by the Communist Chinese." However, as Paul Blustein noted in last Friday's Post, the concerns about China's market power from a Unocal purchase affecting U.S. energy prices and supplies are absurd:

it is hard to see how the Chinese purchase of Unocal could affect petroleum availability or otherwise endanger U.S. security, many global energy experts say. China may be a potential military adversary, and congressional frustration over Chinese trade policy drives much of the animus toward the deal. Still, some fears about China's grab for oil reserves are at odds with experts' view of how global oil markets work.

Those markets are vast and fluid. Known oil reserves exceed 1 trillion barrels, daily production averages more than 80 million barrels, and traders readily swap tankers full of crude to balance excess demand in some parts of the globe with excess supply elsewhere. Accordingly, said Philip K. Verleger Jr., an energy specialist at the Institute for International Economics, "there is absolutely no reason why we should care" who owns Unocal's oil and gas reserves, which total about 1.75 billion barrels.

Even though Chinese control over Unocal's reserves, which are mostly in Asia, might ensure that the company's petroleum was shipped to China during an energy shortage, "the cost of oil will be set between world supply and demand, and not by arrangements like this," agreed Robert J. Priddle, the former executive director of the Paris-based International Energy Agency. "This won't change the price of oil, or the availability of oil."

....During the oil crises of the 1970s and 1980s, Priddle and other experts recalled, several European countries established national oil companies with the aim of assuring supplies, and nations such as France cozied up to Iran, Iraq and other oil suppliers. But when oil shipments were cut off, "they had the same problems we did" with higher energy prices, said Amy Myers Jaffe, associate director of the energy program at Rice University's James A. Baker III Institute for Public Policy.

"Owning reserves doesn't change the price," Jaffe said. "If the price of oil goes to $125 a barrel, and China owns a field in Sudan, the price for them is still $125."

posted by Dan on 07.05.05 at 12:48 PM


I fail to see how an expansion of Chinese interests into the US, thus somewhat aligning those interests, would do anything but lessen the likelihood of a future military conflict. Is this off base?

posted by: Horatio on 07.05.05 at 12:48 PM [permalink]

China is angling for the Asian reserves of Unocal; the American reserves are chickenfeed, apparently. And what else is China going to do with all that paper it's got courtesy of the US government and Wal-Mart? Diversifying from dollars (cash) into oil sounds like a pretty smart move...

posted by: jack on 07.05.05 at 12:48 PM [permalink]

We had these same fears with Japan and Germany during the 80s and 90s. On the other hand let me be the first to say screw what the Chinese government thinks.

posted by: Mark Buehner on 07.05.05 at 12:48 PM [permalink]

The Chinese are reported to be spending some of their new found wealth on the weaponry needed to sink the aircraft carriers of the 7th Fleet.

If we have to reinstitute the draft I hope we do so in the following sequence:

1. children of administration officials and members of Congress

2. anyone who used a student loan to obtain a PhD or law degree

posted by: save_the_rustbelt on 07.05.05 at 12:48 PM [permalink]

"If we have to reinstitute the draft I hope we do so in the following sequence:

1. children of administration officials and members of Congress

2. anyone who used a student loan to obtain a PhD or law degree"

Is there a particular reason you think poor, smart people should be drafted first? So that the dumb, rich ones can stay behind to run things?

posted by: Norman Pfyster on 07.05.05 at 12:48 PM [permalink]

Before we get too much further on who should be drafted, let me point out that posts on this subject are off-topic and would fit better any one of about 500,000 discussion threads elsewhere on the Internet.

posted by: Zathras on 07.05.05 at 12:48 PM [permalink]


The Yellow Peril is Coming! Run for your Lives!!!

This is a 12 billion dollar deal. That's not very big in the grand scheme of things. And surely the Unocal shareholders don't deserve the 20% worse deal that Chevron is offering?

posted by: jack on 07.05.05 at 12:48 PM [permalink]

Is it possible that Congress is scared about the takeover bid because it could show a shift from the Chinese buying T-bills to buying US companies? If this were to happen could it threated the US government's financial position?

Which Chinese actually buy T-Bills? Is it the government or state owned firms like this?

posted by: sien on 07.05.05 at 12:48 PM [permalink]

Haven't you all heard? The Chinese have slanty eyes and yellow skin and speak in a bunch of gibberish, so they MUST BE EVIL!!!!!!!!

Furthermore, it is known that they want to destroy America. Didn't you see the Manchurian Candidate?

posted by: Barry P. on 07.05.05 at 12:48 PM [permalink]

Economics would say: let them buy it. If they pay too much for it, only the better for the (American) sellers. But i wonder, in this time of nervous oil markets, when everybody is fretting about oil at $60,- or perhaps even higher, what would be the effects of further Chinese expansion in this sector? Will it merely drive up the price of oil companies or could it create a politically driven scramble for them, will all the resulting misallocations of funds? Anybody any ideas?

posted by: Harmen on 07.05.05 at 12:48 PM [permalink]

not sure about the jaffe quote - wouldn't it depend on the terms of the contract. if the price of oil was fixed in the long-term, China might buy the oil at $50 a barrel - not $125. It would then be up to the government of china to set the retail price in china - which need not match the going world market price. remember the recent wapo article about oil in iran - which is sold internally cheap (forgoing potential profits). the same is true of russia , iraq and lots of other oil producers. the result - more global consumption than otherwise would be the case. I don't think the purchase of unocal per se raises a national security issue, but the fact that retail gas is even cheaper in china than in the us might. retail gas is a government controlled price in china (not hard to do if the state controls the 3 oil distributors)

posted by: brad on 07.05.05 at 12:48 PM [permalink]

Dumb question: if the oil market's as perfect as the WaPo quote suggests, why do whichever Chinese are involved want Unocal and other reserves? Sounds like someone's not thinking quite straight, but who? Establishing a national oil company that cozies up with suppliers is one thing. Nationally owned reserves might be another. Sure, a subsidy wouldn't work in the long run, but maybe there are situations where the long run isn't what matters. Just asking.

posted by: RCS on 07.05.05 at 12:48 PM [permalink]

The Chinese are obviously trying to repatriate some of those dollar reserves they have piling up by overpaying for an oil company. I say 'let 'em'.

Remember when the Japanese did something similar during the 'bubble economy'? Buying moviemakers? Vastly overpaying for famous golf courses and Rockefeller Center? Same thing.

posted by: Don on 07.05.05 at 12:48 PM [permalink]

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