Editor's note: The attempt of China National Offshore Oil Corp. to acquire the leading U.S. energy company, Unocal, at a high price has huge repercussions for Americans. Among the main concerns are unfair imbalances between the Chinese and American economies, as well as the increased risk of threat to national security. This article is a detailed analysis of this incident in the emergence of China.
In July, CNOOC, China's third largest oil company, offered US$18.5 billion for the American company Unocal, which had already accepted a previous offer of $16.4 billion by Chevron. China proposed a cash payment.
This is possibly the most extreme attempt to swallow an American company in the history of Chinese enterprise. Previous acquisitions include China's Lenovo Group buying out IBM's PC unit for$17.5 billion and China's Haier Group bidding $12.8 billion for Maytag, an American company selling electric home appliances. The newfound "generosity" of Chinese businesses has shocked the world over, including the U.S. House of Representatives. It seems talk about China includes talk about its economic "emergence," since its pricey acquisitions demonstrate China's increasingly competitive economic policies.
U.S. politicians have begun to take note, since such purchases hint at threats to national security. They are concerned that such acquisitions not only would allow the Chinese to control U.S. oil resources, but also obtain the latest U.S. technology in fields such as deep-sea exploration. Not long after CNOOC's bid for Unocal, 41 House Republicans and Democrats co-signed a letter to President Bush requesting that the administration put a stop to the "snake swallows elephant" type of behavior. The Bush administration responded that it would investigate and appraise whether the acquisition indeed posed a political threat. U.S. regulations mandate that such a major acquisition be approved by the U.S. Treasury-led Committee on Foreign Investment in the United States.
Rejected
U.S. Congress overwhelmingly approved a resolution (H. Res. 344) that expressly requested the Treasury stop CNOOC's acquisition of Unocal. Angered by the resistance, Beijing advised the U.S. government to "correct its mistaken ways of politicizing economic and trade issues." The battle of words escalated. The House Committee on Armed Services held a hearing and immediately put the matter into the context of national security. Also, some senators began to consider legal avenues seeking to explicitly forbid CNOOC from taking over Unocal.
Facing strong objections from the U.S., the Chinese enticed Unocal by raising the offer by $5 billion and increasing the deposit to $25 billion; meanwhile, it intensified its efforts to separate the Unocal issue from the political realm, calling the acquisition bid simply an act of "normal commercial activity between enterprises."
As a state-owned enterprise, however, CNOOC is controlled directly by the Chinese Communist Party. Its offer of $18.5 billion (subsequently increased to $19 billion) is more likely a symptom of a deeper political agenda rather than a healthy sign of China's "emergence" phenomenon. The situation bears a striking resemblance to the policies of the former Soviet Union: despite the fact that the majority of its people are poor and GDP is still low, the government somehow manages to gather and dispatch the nation's limited funds through the control of the centralized state government and use these funds to further its political or military ambitions. This is what allowed the former Soviet Union to compete with the U.S. in military, science, technology and space exploration. Today, China's economic output is only 4 percent of the world's total output, its GDP ranks seventh, and average GDP per person is even lower, around 100th. The question is: From whence come the funds that allow it to wrestle for the big deals? The answer may be no surprise to those educated in the 55-year-long history of the CCP, who witnessed Mao Zedong collect farmers' lands leaving them destitute, and redistributing the money at will. The Communist Party's exploitation of China's hard-working and severely underpaid work force is now half a century old, but unfortunately it didn't end when the Mao years did; financial exploitation has only continued to take on new forms under Jiang Zemin and Hu Jintao.
The Chinese government is directly involved in the acquisition of overseas corporations. Its actions are obvious. For example: Two of China's largest vehicle group – Shanghai Automotive Industry Corp. (Group) and Nanjing Automotive Group competed to buy British MG Rover. Nanjing succeeded in the acquisition because of its higher bid. Chinese media revealed that the purchase plan of Nanjing was strongly supported by a certain finance corporation in China. Insiders in Nanjing Automotive also boasted privately that their purchase action had obtained the support of the "National Development and Reform Commission"
Trade with China is severely imbalanced
Unlike the CCP's absolute control over CNOOC, Chevron is a private American enterprise. No matter how influential it becomes, it cannot be supported by the U.S. government, and can only act according to the rules of the economic market.
But there is yet another set of uneven game rules: China absolutely prohibits a foreign company from buying an entire Chinese enterprise, especially large enterprises. China also has a stiff policy that foreign investments in Chinese enterprise must not exceed 49 percent of total shares, that is, the Chinese side must retain majority control of the company. On the other hand, the open economy of the U.S. has given the Chinese government the opportunity to "swallow a whale." The U.S. side has pointed this out on many occasions during negotiations to resolve Sino-American trade conflicts: The U.S. has no special requests but that trade is conducted on fair terms. The U.S. has opened up its market to China, but China has not entirely freed its market to the U.S., and as a result the two sides are playing on uneven turf.
While the acquisition bid of Unocal has infuriated many Americans, another quietly emerging phenomenon should also be noticed: North Korea's "six-party talks" on nuclear weapons, previously postponed for one year due to North Korea's withdrawal, have suddenly revived. On the surface, it appears that Pyongyang has agreed to return to the negotiation table; in reality, Beijing is manipulating behind the scenes. First of all, only Beijing – which has given the most aid to North Korea and whose stand as been the most consistent – can influence Pyongyang. Secondly, Beijing, acting in the role of a "two-faced middleman," feels that it once again has the opportunity to bargain with Washington: The U.S. might decide to give Unocal to China on account of its need for Beijing's help in resolving the North Korean nuclear conflict.
The U.S. government faces a cruel dilemma. From a purely commercial perspective, the price offered by the Chinese government is indeed attractive to Unocal and has short-term benefits for the U.S. economy; from the perspective of national security, the Chinese government's aggressive offer will have far-reaching consequences. Seventy percent of the oil and natural gas reserves controlled by Unocal are in Asia and the Caspian region. If the Chinese government succeeded in buying Unocal, then it would have control over the natural gas and oil reservoirs in India, Thailand, Azerbaijan, Bangladesh and other countries. At a time when the competition for resources between the U.S. and China is at its most intense, swallowing the No. 1 U.S. oil conglomerate is like snatching food from a tiger's mouth. Now that world oil prices have sharply increased to over $60 a barrel and could go higher, any more control the U.S. gives to China will pose overwhelming risks to U.S. security.
Here's why: Unocal has experience in dealing with the Afghanistan Taliban government and Burmese military government, and owns more than 140 billion cubic meters of natural gas reserves in Yadana oil fields along the coast of Burma alone. If Unocal is taken over by China, one can imagine the subsequent potential strategic risks.
Underlying China's "emergence" lays the potential risk of an alliance with dangerous nations
At the same time, the U.S. is apprehensive that rejecting China's offer might give the CCP reason to turn to "dangerous nations" in their desperation for resources. To obtain resources by every possible means, Beijing has already established a close relationship with the civilized world's common enemies – Sudan, Iran and other countries – not only putting huge funds into these highly dangerous nations to exploit resources, but also supplying nuclear diffusion weapons on a large scale to Iran, strengthening its ability to fight against the civilized world. Whenever Western nations try to raise the issue of genocide in Sudan and Iran's nuclear weapon strategy at the U.N., the Chinese government threatens to veto. With the emergence of conservative Moslems in Iran's elections, the close relationship between China and Iran has gone a step further. The chances of the two nations joining hands against the civilized world have increased. Therefore, whether Beijing acquires Unocal will not change China's policy of forming increasingly close alliances with other dangerous nations.
Everyone is familiar with the idea that the Chinese military's so-called "modernization" is actually "Russianization" (to be like Russia, or the former Soviet Union), using Russian types of equipment, a Russian-type of military organization. Similarly, the so-called "emergence of China" sounds dangerously similar to the former Soviet Union's "emergence" in gathering the country's resources under an autocratic system, increasing economic output, and giving those in power the extraordinary capability to mobilize and gather all of the country's resources in order to prove itself as an equal to the U.S. China is keen to acquire U.S. companies at all costs. On the surface, it seems to be a desperate need for resources; in reality, it is the hidden ambition to strategically control America's economic lifeline. In its own words, this is how to "fight a battle without gun smoke."
Sustaining continued economic growth has already become the CCP's most important bargaining counter in maintaining their power (or what they like to call "social stability"). In order to do this successfully, Beijing must maintain the appearance of a "prosperous China," using so-called "economic emergence" to divert the attention of insiders and outsiders, dilute the bloody massacres it has committed in history, and divert eyes from its continued violations of human rights. To achieve its objectives, the CCP will probably spare no efforts in its pursuit of control over the world's resources, and the whole world should watch it closely.
Reprinted from Open Magazine August 2005
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