Why China is Buying
As China’s economic growth continues, many of its most successful companies are beginning to buy up foreign subsidiaries. What that means for American companies is that Chinese companies, largely state operated, are totally un- purchasable while Americans companies are at the mercy of Chinese companies that can take out huge loans from state owned banks.
A perfect example of this is Unocal, an American oil giant that used to be the parent of Union 76 gas stations. A now struggling international company with large holdings in Asia, it has become a very attractive buy for many Chinese energy companies. The most aggressive of these companies is CNOOC, or China National Offshore Oil Corporation. Fu Chengyu, chairman of CNOOC has already seen incredible potential in purchasing Unocal. With large oil reserves in the Indian Ocean and elsewhere in Asia, oil could be easily transported to help fuel China’s rapidly growing environment. The value of this purchase is apparent, but not its logistics. Up against U.S. Oil company Chevron, CNOOC has had difficulty outbidding the larger company. However, Fu, it seems has finally managed to do the unthinkable. His bid of $18 billion tops Chevron’s of $16.5 billion and CNOOC is not even worth close to $18 billion. To make this bid, CNOOC is taking out a massive $8 billion dollar loan from its parent state-owned bank while partnering with a U.S. equity firm for another $2 billion and shelling out another $10 by itself connected to other loans that it is taking out. This is a very large gamble for a comparatively small company, but Fu Chengyu has great faith in his judgment. Investing from a value driven perspective, Fu believes that the margins from Unocal’s extra plants will more than justify such a bold move. Chevron, without the ability to leverage sources like state-owned banks steeped in foreign currency, cannot hope to beat this bid.
However, not everyone in the U.S. is happy about this bidding war. Trade relations are already strained between the U.S. and China over issues such as China’s flooding of the textile industry and its unwillingness to yet un-peg the Yuan from the dollar. Such a purchase of an American industry by a Chinese one would represent a sort of succumbing of American businesses to the allure of Chinese markets which to the government may be distasteful. Long critical of China’s communist regime and its relative lack of human rights, U.S. lawmakers and the international community have always thought that by entreating China economically, they would see the ideological and social changes they wanted in China. However, with China becoming so big and so powerful, it is gradually becoming harder to see who exactly is pulling the strings and who exactly will pull the strings in the future.