Cash-rich China is poised to shop

WASHINGTON - Whether a Chinese state oil company succeeds in buying Unocal, the proposed purchase is a harbinger of a lot more Chinese overseas investment to come, economists say.

China will keep scouring the globe for energy and raw materials assets it says it needs to fuel its eye-popping growth. But Chinese computer maker Lenovo's purchase of IBM's personal computer unit and a Chinese appliance maker's pending purchase of Maytag show that China is casting its gaze on the manufacturing sector in the West, with the aim of gleaning brand names, distribution channels and business expertise.

"Since China is becoming a major economic power, it is only natural that it will acquire foreign assets," says Nouriel Roubini, an economist at New York University. "That is part of globalization."

David Dollar, the World Bank Country Director for China, predicts that China's new five-year economic plan, due out next year, will aim to ramp up overseas investment. "They are gradually going to be reducing the restrictions," he says.

If the deal goes through, CNOOC's $18.5 billion bid to buy Unocal will vault China into the big leagues of foreign direct investment, pushing such investment to more than $22 billion in 2005.

Loosely defined as a controlling stake in a foreign company or venture, foreign direct investment totaled $3.6 billion last year, according to China's Ministry of Commerce. But it topped $1 billion only twice before, in 2003 and 2000. In 2001, it was a paltry $102 million.

For a long time, China discouraged outward investment. But in 2002, the government launched its "go-out policy" with the aim of shifting a portion of investment away from its overheating economy, where returns have begun to sag. Companies eager to find profitable uses for their savings have begun to respond.

Chinese companies are not so much interested in growing manufacturing capacity as they are in purchasing strategic assets that will expand their distribution in key markets, give them access to proprietary technology or improve their relationships with suppliers.

For example, the Shanghai Automotive Industry Corp. was in talks to buy British automaker Rover because it wanted to get its hands on proprietary design and engineering knowledge.

And Lenovo's purchase of IBM's PC unit has allowed it to pick up a sales force of 20,000 in Europe and the U.S. that will help it break into these markets.

The Chinese strategy of racking up brand names differs markedly from Japanese investment strategy in the 1980s, says Oded Shenkar, a professor at Fisher College of Business at Ohio State University and author of the book The Chinese Century. "They are trying to buy their way in," he says.

Haier's $1.28 billion pending purchase of Maytag, which was also announced last week, leaps out as an example. But less well known is the purchase of Royal, the maker of the Dirt Devil vacuum, by a Chinese company. "Everyone says Dirt Devil is American as apple pie," Shenkar says. "It's actually already owned by the Chinese."

While China's strategy in the manufacturing sector may make good business sense, experts are stumped over its tack in the energy sector. Plagued by energy security worries as a country scarce in natural resources, China has been buying up oil and gas assets in places as far-flung as Australia, Sudan, Kazakhstan and Peru.

"But owning does not guarantee access," said Nick Lardy, a China expert at the Institute for International Economics in Washington. In the extreme case of war, for example, China will be hard-pressed to keep oil and gas shipments going, even from nearby fields in Asia, he says. "They will be blockaded on the first day."

Lardy adds that future purchases in the U.S. energy sector are unlikely because the Unocal bid is driven by China's energy security fears. With most of its oil reserves in Asia, "Unocal is a bit of an outlier, and I think that is why it is the target," he says.

The country's huge trade surplus with the U.S. generates a steady stream of dollars for Chinese firms. Typically, the Chinese central bank buys up these dollars and invests them in U.S. Treasury bonds and other low-yielding dollar assets. Its hoard of Treasuries topped $230 billion at the end of April.

But now that Chinese firms are getting the green light to invest abroad, there will be a shift in overall investment away from Treasury bonds. "The Chinese are new to all this money," says Mark Zandi of Economy.com. "Until recently, they did not have the infrastructure in place to invest it."

Meanwhile, competition at home will spur Chinese companies to look abroad for higher returns. Wages are starting to rise in China, and good investment opportunities are growing scarcer.

"A lot of these companies want to expand," Dollar says. "If they all try to expand in China, they are going to get their profit margins squeezed."

Chinese bid for Unocal raises concern in U.S. *****.......Unocal, which has operations in Houston, has oil and gas operations in China's back yard, including Thailand, Indonesia and Bangladesh. But the company's enticement goes beyond natural resources.

Chinese energy companies need better access to technology and Western-style management know-how as much as they need reserves.

Even though China has huge coal reserves, one Chinese company bought a U.S. coal outfit for its technology. It had a coal gasification pilot project the company wanted to learn from, Spiegel said.

Unocal's deepwater technology, field operations expertise and political negotiating skills could fill some seriously gaps at CNOOC. ......... ***

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***...Lardy adds that future purchases in the U.S. energy sector are unlikely because the Unocal bid is driven by China's energy security fears. With most of its oil reserves in Asia, "Unocal is a bit of an outlier, and I think that is why it is the target," he says....***

Yet while race-conscious and intensely introverted, Chinese nationalism does not-like, for example, Irish nationalism-see its scope as limited by strict geographical bounds. The ambitions of Chinese nationalists are not restricted to Chinese territory, they are hegemonic. Indeed, they are imperial. In the early 1950's, when the world's attention was distracted by events elsewhere, Mao set about reassembling the old Manchu empire by asserting control over Eastern Turkestan, Inner Mongolia, and Tibet. The base populations of these regions are not Chinese, and their cultures have nothing in common with Chinese culture-not even an alphabet. They were, however, claimed as subjects by the Manchu rulers of China, and Mao looked on them as a part of his proper sphere of influence.

............................And the third stumbling block to the restoration of China's greatness is…….the United States. To the modern Chinese way of thinking, China's proper sphere of influence encompasses all of East Asia and the western Pacific. This does not mean that they necessarily want to invade and subjugate all the nations of that region, though they certainly do want to do just that to Taiwan and some groups of smaller islands. For Japan, Korea, the Philippines, Micronesia, etc., the old imperial-suzerainty model would do well enough, at least in the short term. These places could conduct their own internal affairs, so long as they acknowledged the overlordship of Beijing, and, above all, did not enter into alliances, nor even close friendships, with other powers.

Which, of course, too many of them have done, the competitor power in every case being the U.S. It is impossible to overstate how angry it makes the Chinese to think about all those American troops in Japan, Korea, and Guam, together with the U.S. Seventh Fleet steaming up and down in "Chinese" waters, and electronic reconnaissance planes like the EP-3 brought down on April 1 operating within listening distance of the mainland. If you tackle Chinese people on this, they usually say: "How would you feel if there were Chinese troops in Mexico and Jamaica, and Chinese planes flying up and down your coasts?" Leaving aside the fact that front companies for the Beijing regime now control both ends of the Panama Canal, as well as Freeport in the Bahamas, the answer is that the United States is a democracy of free people, whose government derives its just powers from the consent of the governed, so that the wider America's influence spreads, the better for humanity: while China is a corrupt, brutish, and lawless despotism, the close containment of which is a pressing interest for the whole human race. One cannot, of course, expect Chinese people to be very receptive to this answer.

Or, indeed, to anything much we have to say on the subject of their increasing militant and assertive nationalism. We simply have no leverage here. It is no use trying to pretend that this is the face-saving ideology of a small leadership group, forced on an unwilling populace at gunpoint. The Chinese people respond eagerly to these ultra-nationalist appeals: That is precisely why the leadership makes them. Resentment of the U.S., and a determination to enforce Chinese hegemony in Asia, are well-nigh universal among modern mainland Chinese. These emotions trump any desire for constitutional government, however much people dislike the current regime for its corruption and incompetence. Find a mainlander, preferably one under the age of thirty, and ask him which of the following he would prefer: for the Communists to stay in power indefinitely, unreformed, but in full control of the "three T's" (Tibet, Turkestan, Taiwan); or a democratic, constitutional government without the three T's. His answer will depress you. You can even try this unhappy little experiment with dissidents: same answer. Source

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The rising economic clout of China***......Yet some moves are already being made. On Tuesday, the House voted to add to this year's foreign-aid bill a provision that would prohibit the US Export-Import Bank from approving loans to help US firms build nuclear power plants in China.

Backers of the move argued that US government agencies should not help finance China's rise, and that the Chinese should be prevented from obtaining sensitive American nuclear technology.

Rep. Dana Rohrabacher (R) of California went so far as to call China a "Frankenstein monster" threatening US interests..............***

"Meanwhile, competition at home will spur Chinese companies to look abroad for higher returns. Wages are starting to rise in China, and good investment opportunities are growing scarcer.

The most important line in the article."

Indeed. Chinese companies are striking out to invest because they cannot make money at home. In part, because foreign companies already have saturated the Chinese market. (A large chunk of the products "made in China" are not actually made by Chinese-controlled companies.)

In many ways this is a sign of the weakness of the domestic Chinese market, and the hyper-investment that has warped the business climate there. It's also more similar to the Japanese tactics of the 80s than this article lets on, as The Economist describes quite well:

http://www.economist.com/displaystory.cfm?story_id=4127399

"So, like Japanese firms in Hollywood and elsewhere in the 1980s, it seems that Chinese companies that are buying overseas now are mostly being taken in like tourists. If they overpay, resource companies will at least have something to show for their money. Many deals in other sectors look ropy, a consequence of buying poor assets. “But even if these companies suffer brutal losses, there will be plenty of others,” predicts Joe Zhang, an analyst with UBS in Hong Kong. “Thousands of not-so-ready Chinese companies are waiting in the wings.”

In terms of peacefully integrating China into the world economy, this is to be welcomed, not feared. Chinese companies will make their mistakes, and they will need to learn fast. Another wave of hopefuls is already discernible. On June 28th, Thomson of France sold the final leg of its TV operations—not to China's TCL, its partner until now, but to an Indian rival."

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