Ted Butler: The oh-so-predictable flush-out in silver is over

Section:

China Tells Congress To Back Off Businesses;
Tensions Heightened by Bid to Purchase Unocal

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

http://www.washingtonpost.com/wp-
dyn/content/article/2005/07/04/AR2005070400551.html

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."

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