China Tells Congress To Back Off Businesses

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By Peter S. Goodman
Washington Post Foreign Service
Tuesday, July 5, 2005

SHANGHAI, July 4 -- The Chinese government on Monday sharply criticized the United States for threatening to erect barriers aimed at preventing the attempted takeover of the American oil company Unocal Corp. by one of China's three largest energy firms, CNOOC Ltd.

Four days after the House of Representatives overwhelmingly approved a resolution urging the Bush administration to block the proposed transaction as a threat to national security, China's Foreign Ministry excoriated Congress for injecting politics into what it characterized as a standard business matter.

"We demand that the U.S. Congress correct its mistaken ways of politicizing economic and trade issues and stop interfering in the normal commercial exchanges between enterprises of the two countries," the Foreign Ministry said in a written statement. "CNOOC's bid to take over the U.S. Unocal company is a normal commercial activity between enterprises and should not fall victim to political interference. The development of economic and trade cooperation between China and the United States conforms to the interests of both sides."

Those words, the latest rhetorical volley in an escalating trade battle, officially elevated the takeover battle for Unocal into a bilateral issue involving Washington and Beijing, raising the stakes of the outcome.

CNOOC's bid comes as China's emerging force in the global economy continues to sow international tensions over competition for natural resources, impacts on the environment, trade balances and security relationships. The deal would be the latest in a string of Chinese purchases of foreign companies as Beijing encourages domestic firms to seek new markets abroad and secure raw materials for China's aggressive industrialization. The Chinese government has urged energy companies in particular to buy foreign oil fields as China's consumption soars, deepening worries about the country's access to supplies.

Already, CNOOC's bid has taken China across a new threshold: It has unleashed the first takeover battle between a Chinese company and a U.S. firm, the oil giant Chevron Corp., which has its own deal to buy Unocal, for $16.5 billion. If completed, CNOOC's purchase -- its bid is for $18.5 billion -- would be the largest foreign takeover ever made by a Chinese firm.

But as the price of oil continues to soar, underscoring the finite supply of global stocks, some members of Congress portray China's appetite for energy as a threat to U.S. interests. They are painting CNOOC's effort to buy Unocal as an attempt to siphon off oil that would otherwise land in the United States, a proposition that analysts call dubious because most of Unocal's outstanding contracts supply customers in Asia.

As the House adopted its resolution Thursday by a 398 to 15 vote, some noted that CNOOC remains under the majority control of the Communist Party-led state, suggesting that this alone made the deal a threat.

"We cannot, in my opinion, afford to have a major U.S. energy supplier controlled by the Communist Chinese," said Rep. William J. Jefferson, a Louisiana Democrat. Monday's reply from Beijing reinforced what CNOOC has said from the beginning -- that the deal is nothing more than an attempt to expand its business opportunities and invest capital sensibly.

Long before CNOOC emerged with its unsolicited offer for Unocal, the United States-China relationship was already highly complex. There has been friction in recent months over China's roughly $160 billion trade surplus with the United States and surges this year in Chinese-made textiles reaching U.S. shores. Some U.S. trade groups accuse China of manipulating its currency, the yuan, to keep it artificially low, making Chinese goods unfairly cheap on world markets. The Bush administration has pressured China to allow its currency to float freely. China argues that it is being made a scapegoat for the decline of U.S. manufacturing.

Tensions also have grown over North Korea's pursuit of nuclear weapons. In Washington, some suggest that China is not doing enough to pressure North Korea, its longtime ally, to return to stalled talks, while propping up the regime in Pyongyang with food and fuel. Chinese officials have criticized the United States for demonizing North Korea and undermining the possibility of progress.

Taiwan is always a hot button. China claims the self-governing island as part of its territory and threatens to reclaim it by force if Taiwan's government moves toward declaring its independence. The United States is nominally pledged to come to Taiwan's aid in event of war.

The battle over Unocal has injected yet another factor into this already volatile relationship ahead of a planned visit to Washington by Chinese President Hu Jintao this fall.

But analysts say the issue has thus far produced little that could alter the relationship between the two governments, because Beijing has grown sophisticated at distinguishing between rhetoric from Capitol Hill -- where Thursday's resolution was nonbinding -- and policy from the White House, which has said little on the subject.

But whatever comes of the Unocal battle, tensions over Chinese investment are probably only beginning. Just as a rising Japan in the 1980s snapped up high-profile assets in the United States and provoked widespread American unease, China's expanding horizons are having a similar effect.

Moreover, key differences between Japan of that era and current-day China could make this go-round more combustible: Japan was a U.S. military ally and part of the same ideological bloc, whereas China is viewed by many in Washington as an adversary.

But the simplest reason for tension may be the amount of cash at China's disposal: As investment pours in and China's central bank buys dollars to maintain the value of its currency, the country has amassed $650 billion in foreign exchange reserves. China has plowed much of that money into U.S. Treasury bonds.

But the quest for Unocal and other foreign companies is being construed by some as a sign of diversification.

"We invest too much in U.S. federal bonds, and they don't make us much money," said Pan Rui, a professor at the Center for American Studies at Fudan University in Shanghai. "Now we're learning to invest more wisely, to try to invest in American companies and industries."


© 2005 The Washington Post Company

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