Sing it to Me

The news of CNOOC withdrawing its 18.5 billion dollar takeover bid of Unocal was greeted with sighs of relief by many. The whole ordeal raises the broader question of whether the United States should care if a Chinese company purchases a large American company. What United States interests are damaged by such a purchase?

Let's presume that CNOOC was successful in purchasing Unocal and, further, that CNOOC decides to sell its oil only to China--a move that it promised not to make. Unocal's oil would then go exclusively to China, causing China to purchase less oil on the world market. This would lead to additional oil in the world market, increasing supply and decreasing demand (as China would not be purchasing the oil). America, who already imports over 60% of her oil needs, could then purchase this oil, a fungible resource, at roughly the original price.

A second argument, and the primary reason for the proposed Congressional bill by Sen. Dorgan, is that energy is a resource of national security and Chinese control of domestic oil would be a problem in the event of a military conflict. Partly this argument is discredited by the previous paragraph. But there is another angle. Presume there was a military conflict and domestically-located foreign-owned energy resources did come into play. Surely the United States would seize, without breaking a sweat, the domestic oil. Consequently, is it not China who has a bigger national security risk in purchasing foreign energy assets? If anything, does not such a deal allude to improving relationships?

Another argument is that the Chinese government has a 70% ownership in CNOOC and this is inappropriate for a publically owned company. To be sure, China is a communist single-party state. But the Chinese government's involvement in the deal has led primarily to a series of subsidized, cheap loans. If anything, this access to cheap capital, coupled with winner's curse, suggests that CNOOC is overpaying for Unocal--effectively transferring capital from the Chinese government to the US. I don't think the protectionists should mind that.

China's Central Bank owns hundreds of billions of dollars in US debt. Using this money to purchase Unocal is a smart asset-allocation on the part of the Chinese government. They could do much worse with their money: Selling a large chunk of their US government bonds, flooding the market, would cause significant damage to the US dollar and thus be far worse than anything that CNOOC could do with Unocal.

I bet an old energy conglomerate family such as Gasman's would agree.