[Paleopsych] NYT: Krugman: The Chinese Challenge

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Mon Jun 27 23:56:09 UTC 2005

The Chinese Challenge
Opinion column by Paul Krugman, New York Times, 5.6.27

    Fifteen years ago, when Japanese companies were busily buying up
    chunks of corporate America, I was one of those urging Americans not
    to panic. You might therefore expect me to offer similar soothing
    words now that the Chinese are doing the same thing. But the Chinese
    challenge - highlighted by the bids for Maytag and Unocal - looks a
    lot more serious than the Japanese challenge ever did.

    There's nothing shocking per se about the fact that Chinese buyers are
    now seeking control over some American companies. After all, there's
    no natural law that says Americans will always be in charge. Power
    usually ends up in the hands of those who hold the purse strings.
    America, which imports far more than it exports, has been living for
    years on borrowed funds, and lately China has been buying many of our

    Until now, the Chinese have mainly invested in U.S. government bonds.
    But bonds yield neither a high rate of return nor control over how the
    money is spent. The only reason for China to acquire lots of U.S.
    bonds is for protection against currency speculators - and at this
    point China's reserves of dollars are so large that a speculative
    attack on the dollar looks far more likely than a speculative attack
    on the yuan.

    So it was predictable that, sooner or later, the Chinese would stop
    buying so many dollar bonds. Either they would stop buying American
    I.O.U.'s altogether, causing a plunge in the dollar, or they would
    stop being satisfied with the role of passive financiers, and demand
    the power that comes with ownership. And we should be relieved that at
    least for now the Chinese aren't dumping their dollars; they're using
    them to buy American companies.

    Yet there are two reasons that Chinese investment in America seems
    different from Japanese investment 15 years ago.

    One difference is that, judging from early indications, the Chinese
    won't squander their money as badly as the Japanese did.

    The Japanese, back in the day, tended to go for prestige investments -
    Rockefeller Center, movie studios - that transferred lots of money to
    the American sellers, but never generated much return for the buyers.
    The result was, in effect, a subsidy to the United States.

    The Chinese seem shrewder than that. Although Maytag is a piece of
    American business history, it isn't a prestige buy for Haier, the
    Chinese appliance manufacturer. Instead, it's a reasonable way to
    acquire a brand name and a distribution network to serve Haier's
    growing manufacturing capability.

    That doesn't mean that America will lose from the deal. Maytag's
    stockholders will gain, and the company will probably shed fewer
    American workers under Chinese ownership than it would have otherwise.
    Still, the deal won't be as one-sided as the deals with the Japanese
    often were.

    The more important difference from Japan's investment is that China,
    unlike Japan, really does seem to be emerging as America's strategic
    rival and a competitor for scarce resources - which makes last week's
    other big Chinese offer more than just a business proposition.

    The China National Offshore Oil Corporation, a company that is 70
    percent owned by the Chinese government, is seeking to acquire control
    of Unocal, an energy company with global reach. In particular, Unocal
    has a history - oddly ignored in much reporting on the Chinese offer -
    of doing business with problematic regimes in difficult places,
    including the Burmese junta and the Taliban. One indication of
    Unocal's reach: Zalmay Khalilzad, who was U.S. ambassador to
    Afghanistan for 18 months and was just confirmed as ambassador to
    Iraq, was a Unocal consultant.

    Unocal sounds, in other words, like exactly the kind of company the
    Chinese government might want to control if it envisions a sort of
    "great game" in which major economic powers scramble for access to
    far-flung oil and natural gas reserves. (Buying a company is a lot
    cheaper, in lives and money, than invading an oil-producing country.)
    So the Unocal story gains extra resonance from the latest surge in oil

    If it were up to me, I'd block the Chinese bid for Unocal. But it
    would be a lot easier to take that position if the United States
    weren't so dependent on China right now, not just to buy our I.O.U.'s,
    but to help us deal with North Korea now that our military is bogged
    down in Iraq.

    E-mail: krugman at nytimes.com

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