[Paleopsych] NYT: Who's Afraid of China Inc.?

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Who's Afraid of China Inc.?
http://www.nytimes.com/2005/07/24/business/yourmoney/24oil.html

    By [3]STEVE LOHR

    WILLIAM A. REINSCH, an avowed free trader, welcomes China's rising
    stature in the international economy. After all, he is the president
    of the National Foreign Trade Council, an organization founded in 1914
    to promote an "open world trading system." Indeed, when he was a
    senior trade official in the Clinton administration, Mr. Reinsch was
    chided by some security analysts who said he was being soft on China
    by placing matters of commerce ahead of national security.

    But even Mr. Reinsch is uneasy about China's attempt to buy [4]Unocal,
    a midsize American oil company. The outcome of the takeover contest
    for Unocal is uncertain, and last week its board embraced an improved
    offer from Chevron. Yet Cnooc, a government-backed Chinese oil
    company, still has the higher offer - and it could up the ante.

    If the Chinese bid proceeds, Mr. Reinsch wants to see a thorough
    national security review of the deal, one that goes beyond the usual
    focus on weapons technology to include energy security. "Our Army,
    Navy and Air Force run on oil," he explained.

    Oil is the ultimate geopolitical commodity - it is "The Prize," as
    Daniel Yergin titled his epic history of petroleum and international
    politics. And even if Cnooc fails to grab Unocal, the pursuit has
    pushed the two sides of the Chinese challenge together and into the
    spotlight of public debate. For China is both an engine of economic
    globalization and an emerging military power. In symbolic shorthand,
    it is [5]Wal-Mart with an army.

    The two sides aren't neatly divided. But those who focus on economics
    tend to see partnership, cooperation and reasons for optimism despite
    tensions, while security experts are more pessimistic and anticipate
    strategic conflict as the likely future for two political systems that
    are so different.

    In China, there are also two camps - the security hawks and the
    economic modernists, according to China analysts. The modernists see
    China joining the United States as the second great economic power of
    the 21st century, and the two nations sharing the gains from increased
    trade ties and global growth. The hawks regard that view as naïve, and
    fret that American policy is to remain the world's only superpower and
    to curb China's rise. So China's response, the hawks say, is to try to
    erode United States hegemony and reduce America's power to hold China
    down.

    Both faces of China have been evident recently. Two weeks ago, a
    senior Chinese military official, Maj. Gen. Zhu Chenghu, said China
    should use nuclear weapons against the United States if the American
    military intervenes in any conflict over Taiwan. Then, bowing to
    pressure from the United States and other trading partners, China
    announced last Thursday that it would no longer peg its currency
    tightly to the dollar. It is a measured step, and it will not do much
    to moderate China's huge trade surplus with the United States anytime
    soon. But the move is a sign of flexibility and accommodation.

    "Do we see each other inevitably as antagonists, or do we see a world
    of globalization from which both sides benefit? That is the big
    issue," said Kenneth Lieberthal, a senior official in the National
    Security Council during the Clinton administration.

    "And that framework, one way or another," added Mr. Lieberthal, a
    China analyst and a professor at the University of Michigan business
    school, "will drive an enormous number of policy decisions."

    So that is the China question: Is it an opportunity or a threat? If
    nothing else, the Cnooc bid for Unocal has shown how unsettled
    American thinking is on China and how deep the anxieties run, both in
    matters of national security and trade.

    It is easy to dismiss Washington as a hot-air factory, but the scope
    of the outcry in Congress is significant. Resolutions and legislative
    proposals, all critical of Cnooc's takeover bid, have piled up in the
    House and Senate, from Republicans and Democrats. A resolution
    presented last month by Representative Richard W. Pombo, a California
    Republican, declared that permitting the Chinese company to buy Unocal
    would "threaten to impair the national security of the United States."
    It passed, 398 to 15.

    Senator Byron Dorgan, a North Dakota Democrat, has drafted three
    pieces of anti-Cnooc legislation that range from calling for a
    six-month Congressional inquiry into the bid to a bill that would
    prohibit the deal. Mr. Dorgan objects to the Chinese move on
    fair-trade grounds. The Chinese government, he says, would not allow
    an American company to buy a Chinese oil company. "So why on earth
    should they be able to buy an American oil company?" Mr. Dorgan said.

    Yet the Chinese takeover bid taps into a deeper concern about trade
    and globalization for Mr. Dorgan. He talks of manufacturing jobs lost
    to China, intellectual-property pirates in China illegally copying
    American movies and software, and a trade deficit with China that is
    rising astronomically with no end in sight. "Trade should be mutually
    beneficial, and it is certainly not with China," Mr. Dorgan said.

    The tempest in Congress has increased the political risks surrounding
    the Cnooc bid. At $18.5 billion, the bid remains higher than Chevron's
    sweetened offer of $17 billion. But Wall Street analysts say Cnooc
    will have to go higher to have a chance to win, offering a sizable
    premium over the Chevron bid to compensate for delays of a government
    review of the Chinese offer or even the possibility that Washington
    may block a Chinese deal.

    It would be an extreme step, but Congress has the power to "regulate
    commerce with foreign nations," under Article I, Section 8 of the
    Constitution. "My sense is that Congress is not going to stand still
    for a Cnooc takeover being approved," said C. Richard D'Amato,
    chairman of the United States-China Economic and Security Review
    Commission, an advisory group to Congress. "That is the political
    reality."

    Cnooc and its advisers misread the political environment in
    Washington. Fu Chengyu, the Cnooc chairman who earned a graduate
    degree from the University of Southern California, has said he was
    surprised by the intensity of political criticism. Cnooc's path would
    have been smoother if it had joined with an American oil company as a
    partner in its bid, an option that was considered briefly but
    rejected, according to a person close to the company.

    The idea, the person said, would have been that the American company
    would acquire Unocal's assets in the United States, while Cnooc took
    the main prize in the deal - Unocal's offshore natural gas fields in
    Asia and its expertise in offshore exploration and production. The gas
    reserves and skill are considered strategic to China's goal of moving
    away from coal and generating 20 percent of the nation's electricity
    from natural gas by 2020. "It would have been better to have not made
    this big move a head-on attack, to have linked up with an American
    partner so the deal would have been less threatening and less a
    lightning rod for China politics in the United States," the person
    said.

    Perhaps, but many economists and trade specialists contend that the
    American angst over the Cnooc bid says more about the United States
    than it does about China or Cnooc's tactics. "All this really points
    to the anxieties about globalization in our own society," said Clyde
    V. Prestowitz, a trade official in the Reagan administration and
    president of the Economic Strategy Institute in Washington. "We are so
    economically interdependent with China now and we chose that path."

    Washington pushed for China's integration into the international
    economy and its entry into the World Trade Organization in 2001.
    American companies have farmed out much of their manufacturing to
    Chinese factories. American consumers have been on a Chinese shopping
    spree for years, buying everything from clothes to computers made
    there. That is why the United States had a record $162 billion trade
    deficit with China last year. China sits on $700 billion in foreign
    exchange reserves, mostly in dollars. It recycles those funds in good
    part by investing in United States Treasury bonds; that keeps American
    interest rates low, fueling the real estate boom.

    "We handed China the money they are using to try to buy Unocal," said
    Mr. Prestowitz, author of a new book on the shift of wealth and power
    to Asia, "Three Billion New Capitalists" (Basic Books, 2005). "And now
    we're telling the Chinese, please keep investing in our bonds but you
    can't invest what amounts to a sliver of their surplus in an oil
    company. That's really confused and hypocritical on our part."

    Where others see muddle, R. James Woolsey, director of the Central
    Intelligence Agency in the Clinton administration, sees strategic
    clarity in challenging the Cnooc bid. Oil is a globally traded
    commodity, Mr. Woolsey concedes, but it is also a strategic resource
    in a market that is tightening because of rising demand from
    fast-growing nations like China and India. That, Mr. Woolsey says, is
    before one begins thinking of the possible impact of, say, an act of
    terrorist sabotage in a crucial Middle East oil field.

    "China is realistically assuming there may be a shortage of oil," said
    Mr. Woolsey, a vice president in the Booz Allen Hamilton consulting
    firm.

    In China, Mr. Woolsey sees a nation with military ambitions to
    challenge the United States, and a political system with little regard
    for human rights and free speech. Cnooc, in Mr. Woolsey's view, is the
    corporate vehicle of "a Communist dictatorship."

    The Cnooc move, according to Frank Gaffney Jr., a senior Defense
    Department official in the Reagan administration, is a step to ensure
    that China has the resources for its overarching national design.
    "China's strategy is to supplant the United States as the premier
    economic power in the world and, should it become necessary, defeat us
    militarily," said Mr. Gaffney, president of the Center for Security
    Policy.

    The strategic concern was much narrower at William Blair & Company.
    Until recently, William Blair, the investment firm in Chicago, was the
    largest outside shareholder in Cnooc, which is majority-owned by the
    Chinese government. But William Blair sold off its stake, worth about
    $160 million, in recent weeks because of worries that Cnooc was
    behaving too much like a state-owned company and not enough like a
    capitalist enterprise trying to maximize returns to shareholders,
    explained David Merjan, a fund manager at the firm.

    The pricey bid for Unocal, Mr. Merjan said, raised doubts about how
    independent Cnooc really was from the Chinese government. "If China is
    going to sell shares in a company like Cnooc to outside shareholders,
    it should not be run for the benefit of Chinese economic policy," Mr.
    Merjan said.

    [6]CNOOC and its pursuit of Unocal, it seems, are part of China's
    evolutionary path. Cnooc is playing its hand with plenty of government
    help, about $7 billion in loans on terms Western oil companies could
    not hope to get. Accordingly, Cnooc may be willing and able to
    overpay. Yes, China is hunting for oil and gas assets around the world
    as a national priority. Still, that is happening in a nation that is
    drifting steadily toward a market economy, though one with more
    central control than Americans view as a free-market economy.

    The Chinese Communist Party, with 60 million members - more than the
    population of France - does guide the economy, if less and less over
    time. "But think of it as the Chinese bureaucratic capitalist party,"
    said Mr. Lieberthal of the University of Michigan. "It has nothing
    really to do with Communism."

    Mr. Lieberthal counts himself as among the optimists on China.
    Globalization, he says, and continued integration of the Chinese and
    American economies can work to mutual benefit. The spread of
    middle-class affluence and education across more of the Chinese
    population should eventually be a force for democratic liberalization,
    following the pattern of Taiwan and South Korea.

    "Am I a hundred percent sure I'm right? No, but that's the long-term
    bet I'd make," Mr. Lieberthal said. "And if you let the pessimists -
    the people who believe that the U.S. and China will inevitably be
    enemies - drive policy, then the outcome will be the one they
    predict."

    China's pursuit of Unocal puts some Wall Street firmsin an awkward
    situation. DealBook, Page 5.