Chinese Ownership of American Companies: A Problem? BECKER
Should the US care if a Chinese company takes over a large American publicly owned company? This issue arose recently when the China National Offshore Oil Corporation (CNOOC), China's largest offshore oil producer, put forward a bid to buy the American oil and gas company, Unocal Corp, that significantly exceeded the competing offer from Chevron, another American oil company. The attempted takeover of Unocal by CNOOC aroused great opposition in Congress, which resulted in Senator Byron Dorgan introducing a bill that would prohibit any takeover or merger of these two companies. After pursuing Unocal for several months, CNOOC accepted defeat last Tuesday and withdrew its offer, blaming the Washington political atmosphere.
The Dorgan bill lists several reasons why the purchase of Unocal by CNOOC would not be in America's interests, but none are convincing. The first claim is that "oil and natural gas resources are strategic assets critical to national security and the Nation's economic prosperity." Among other things, this statement ignores that more than half of Unocal's oil and natural gas production is from seven countries outside of North America. Many countries, including Mexico, Brazil, and most Middle Eastern oil producers, have used the "strategic asset" argument to justify why government companies should control oil and natural gas production. They even do not trust domestic private companies with these assets. Fortunately, the US has not taken this path and has had a privately run and efficient energy sector.
Why would it hurt US interests if Chinese companies owned oil and gas producing assets in this country? The US already imports about 2/3 of its oil needs, and pays world prices for both imported oil and indirectly for its domestic oil. If CNOOC took over Unocal and only sold its output to China-which it promised not to do- that would replace other oil or gas that China would have bought on the world market at world determined prices- the present oil price is about $60 a barrel. So the oil and gas that would have been purchased by China would become available for American use at effectively the same prices Americans now pay when Unocal is an American company.
Even if Chinese companies controlled all American oil and natural gas reserves, a very unlikely event, they would still have a much smaller fraction of world oil and natural gas reserves than Saudi Arabia, Russia, and several other nations. Even then they would do minimal damage to the US if they sold all their US production to China since the US would then import what China would have purchased on world markets. In the event of a military showdown between China and the US, clearly the producing assets here would be taken away from the Chinese companies, and transferred to domestic companies. So that puts China, not America, at the greater economic risk in the event of a serious confrontation between the two nations.
The Dorgan bill also opposes the CNOOC bid because the central government of China owns about 70 per cent of the company, and the acquisition of Unocal would have been financed and subsidized by state-owned Chinese banks. Why should Chinese subsidies to help finance the bid be of concern to American interests? In fact, most large state-owned enterprises in China are inefficiently run, and they can only receive loans from state banks because banks are politically forced to make these loans. As a result, bank loans to state enterprises amounting to hundreds of billions of dollars are in trouble, and many are considered worthless. So it is very likely that CNOOC overbid for the assets of Unocal, which would have meant a transfer of dollars to stockholders of Unocal from the Chinese government.
The protests raised by CNOOC's attempt to buy Unocal were unusually strong, but there was also opposition to IBM's selling its unprofitable PC business to China's top personal computer company, Lenovo, and some discontent when a Chinese company bid for Maytag, a bid that proved to be unsuccessful. The continual opposition to Chinese companies buying American companies is reminiscent of the concern in the 1980's when Japanese companies, flush with liquid funds from its booming stock and real estate markets, purchased Pebble Beach Golf Course, Rockefeller Center, and many other renowned American institutions. There were threats then too to legislate limits on the scope of these activities, although Japanese companies never controlled more than a negligible fraction of land and other assets in the United States. As it turned out, Japanese companies greatly overpaid for most of their acquisitions, and ended up transferring some of their bubble-generated wealth to Americans.
Since China is much bigger than Japan, it is claimed to pose a much bigger economic threat to the US. However, a rich country like Japan is in more direct competition with the products produced and inputs used by American companies than is a poor nation like China. I believe the welfare of the average American is raised by the economic growth of both these nations, but especially by that of China, for China produces many labor-intensive goods, like toys and textiles, much more cheaply than they could be produced in America. Countries like Bangladesh might be hurt by China‚Äôs growth since they compete with similar products, but the typical consumer in the developed world has been helped by the economic development of China, India, Brazil, and other poorer nations.
Most politicians and journalists, and even many economists, support free trade, including purchase by foreign companies of American assets, only when other countries abide by the same free trade rules. As the Dorgan bill indicates, China does not allow free movement of capital, and restricts foreign purchases of Chinese companies. These policies hurt China, but nevertheless the US is better off when it allows foreign companies, including those from China, to bid for American companies. If they are high bidders, either they would overpay for the assets-called the "winners curse" in auction theory- or they are more efficient managers. The US benefits even in the second case because it raises overall productivity of the American economy, and sets a good example for competitors. The American auto industry is more efficient (and much smaller) than in the past in part because they had to compete with cars made in the US by efficient Japanese and German auto manufacturers. American car owners are also getting much better cars at lower prices than they would have had without foreign-owned auto companies in the US.
So for all these reasons my answer to the question posed by the title of my comment is ‚Äúno‚Äù, that Chinese ownership of American companies is no problem or threat to American interests.