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To: BubbaFred who wrote (65586)	6/27/2005 9:34:10 PM
From: BubbaFred	Respond to of 74559

China's Latest 'Threat' By Sebastian Mallaby Monday, June 27, 2005; Page A15 Some people fear the economic threat from China. Others fret about expensive oil. With the skill of an accomplished arsonist, China has now poured gas on the flames of these separate anxieties, turning two medium-size fires into a single inferno. The arson takes the form of a bid by a largely state-owned Chinese oil company for California-based Unocal. Until Wednesday, Unocal was heading into the arms of Chevron, which had made a friendly takeover offer. But China National Offshore Oil Corp. is offering a premium for Unocal's assets, triggering a fight over whether the federal government should block it on national security grounds. The Unocal bid brings China one step closer to stirring up the sort of full-blown protectionist fury that confronted Japan two decades ago. Critics were already anxious about China's global strength in low-end manufacturing, its allegedly manipulative currency policy and its piracy of U.S. intellectual property. Now they can also worry about China's acquisition of U.S. companies. Last year a Chinese firm took over IBM's personal computer business, and now another one is bidding for Maytag, which makes household machines including Hoovers. The Unocal bid, at $18.5 billion, would be the biggest Chinese deal so far. Does it matter if China owns U.S. companies? Japan went on a corporate spending spree in the 1980s, and the chief victims were not Americans, as the protectionists predicted, but the Japanese themselves. The Japanese paid inflated prices for Hollywood studios and landmark New York buildings. The exiting American owners made off with a nice profit. The Japanese got burned. The Unocal bid has triggered the same muddled complaining that attended those Japanese takeovers. The protectionists say the Chinese want to pay for Unocal with cheap loans from their taxpayers, just as Japanese corporations were once denounced for accessing cheap capital from servile banks. But this means that China's taxpayers are offering sure profits to Unocal's shareholders. Admittedly, it also means that Chevron's shareholders stand to forgo a business opportunity, but then that opportunity may not have paid off. From the view of U.S. economic interests, this is a net plus. Equally, the protectionists say that if the Unocal bid is allowed to go forward, the Chinese will use the power of corporate ownership to manipulate oil prices; worse, China could even blackmail America by withholding energy supply. This echoes old fears of Japanese semiconductor makers, which were said to be plotting sinister dominance of the memory-chip business in the 1980s. As the protectionists explained it, the Japanese plan was to destroy U.S. rivals by undercutting their prices, then later to ramp up their own prices and hold U.S. industry (including the defense industry) for ransom. But the protectionist fears are based on a misunderstanding of markets, which are harder to corner or manipulate than people seem to understand. Japan's assault on the memory-chip market never did produce the feared lock on this product. Instead, U.S. chipmakers prospered by moving upscale from plain memory chips to fancy microprocessors, and the supposedly oligopolistic Japanese memory-chip firms were soon challenged by South Korean rivals. Does China's advance on the oil market threaten American interests more acutely? It's true that oil is a political commodity: Saudi Arabia and other big producers use their power over the oil price as a diplomatic lever. China, for its part, has a clear policy of buying up oil fields to boost its energy security. Since foreigners aren't taking a free-market view of the oil business, it may seem naive for the United States to do so -- especially when oil prices are around $60 a barrel. Yet it's hard to paint a plausible scenario in which Chinese control of Unocal would hurt us -- despite loud exclamations to the contrary from Congress. For one thing, Unocal's oil output accounts for a tiny fraction of U.S. consumption. The firm's chief asset is undeveloped natural gas in Indonesia that's going to take at least five years to develop -- by which time the current tightness in the energy market will probably have dissipated because of the development of new oil fields. But there's a more fundamental objection to the protectionist anxiety. The protectionists worry that China will ship all of Unocal's output home to its own industries, thus hogging scarce oil supplies and taking them "offline." Even if this were possible, it wouldn't matter: Unocal's oil and gas would be meeting Chinese demand that would otherwise have to be met by Chinese purchases on world markets. In other words, China would be reducing both the supply and the demand for energy in the open market. Prices paid by American consumers wouldn't budge. What if there were a real oil crisis? A simulation conducted last week in Washington suggested that a couple of middling terrorist attacks in Saudi Arabia and Alaska would be enough to cause a global oil shortage, sending prices above $100 a barrel. Yet Chinese ownership of Unocal wouldn't affect this picture. China could respond to the crisis by routing Unocal's energy to its own industries. But again, oil is fungible, so this wouldn't matter. You can see why this is not the dominant view in Congress. China is, after all, a communist dictatorship, and we shouldn't assume its intentions are friendly. Equally, the American oil addiction is a genuine problem, and we should strive to break our dependence on potentially unstable suppliers such as Saudi Arabia. But although the Unocal bid seems to yoke these twin problems together, the appearance is deceptive. If you look for a convincing reason to block China's bid for Unocal, you're not going to find one. washingtonpost.com

To: BubbaFred who wrote (65586)	6/27/2005 11:37:26 PM
From: shades	Read Replies (1) \| Respond to of 74559

The latest from Professor Krugman - when are we gonna get Jr. to whack them with the big stick? The Chinese Challenge 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 I.O.U.'s. 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 prices. 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. Originally published in The New York Times, 6.27.05