Unocal bid won't slow China's shopping spree

John W. Schoen Senior producer • Profile • E-mail

Congress may have been able to stop CNOOC from buying Unocal, but expect Chinese companies to continue to try to buy up U.S. companies. After all, they have to do something with all the dollars we’re sending them. But unlike a similar shopping spree touched off by a U.S. trade imbalance with Japan in the 1980s, this time around China and the U.S. could be headed for a strategic tug-of-war over global national resources, top management talent and technology.

China’s efforts to acquire U.S. companies have been on the rise for years. Last month, Chinese appliance maker Haier dropped a $1.28 billion bid to buy U.S. appliance maker Maytag. The move followed the successful $1.75 billion bid late last year of IBM’s PC division by Chinese computer maker Lenova.

But with crude prices hitting new records, it was an $18.5 billion bid by state-run oil company CNOOC to buy U.S. oil company Unocal that touched off a nasty political backlash and prompted Congress to successfully block the takeover.

"The political reaction has scared off the board of Unocal, the shareholders and CNOOC itself," said Edmund Harris, fund manager at Guinness Atkinson, which holds CNOOC shares. "I don't think anybody really anticipated quite what a maelstrom they were entering into."

Underlying U.S. opposition to China’s Unocal was the fear that greater control over Asian oil and gas supplies would increase Beijing’s leverage in the region. Recent talks between President Bush and India about military and nuclear cooperation were seen by some observers as a shot across China’s bow. If both sides continue to regard the other as a threat, that will likely lead to more protectionism in the U.S., according to Ian Bremmer, president of the research and consulting firm Eurasia Group President.

‘The real risk is ... that continued very strong Chinese growth leads to greater conflict between the United States and China.’ — Iam Bremmer Pres., Eurasia Group

“There is some strategic competition which is surfacing between the United States and China,” he told CNBC. “The real risk is not that there’s going to be a hard (economic) landing, as Wall Street analysts have talked about for the last couple years, but that continued very strong Chinese growth leads to greater conflict between the United States and China."

Even as Congress and the White House were lowering trade barriers this week with the signing of the Central American Free Trade Agreement, CNOOC's bid for Unocal had already sparked an effort to build an economic Great Wall around the U.S. to turn back the Chinese invaders. Bi-partisan opposition to CNOOC’s bid spawned a provision to the recently enacted energy bill that all but doomed the deal.

“This was a perfect storm,” said Bremmer. “Democrats and Republicans together all seeing the opportunity to beat up on the Chinese. The talk was about fact that you don't have a fair openness for American investors into the Chinese market. And that this isn't a player that is going to allow the free market mechanism to reign in terms of what they are doing with their own economy.”

But the forces driving China’s shopping spree for foreign assets show no signs of letting up. China’s economy grew at an annual rate of 9.5 percent in the second quarter –- nearly three times as fast as the U.S. economy. To satisfy increased demand for the raw materials needed to fuel that growth, China has to look outside its borders for everything from crude oil to scrap steel.

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