Let China participate in the global economy

Jack Kemp
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Posted: Jul 11, 2005 12:00 AM

Recently the China National Offshore Oil Co. made a bid to purchase the U.S. oil and gas producer Unocal. From the alarmist and jingoistic reaction of many in Congress, one would think that the Chinese government had launched a hostile takeover bid of the American economy. Rep. Carolyn Cheeks Kilpatrick, D-Mich., went so far as to offer an amendment to an appropriations bill to prevent the traditional government review process - known as CFIUS - of the proposed deal from ever taking place.

Much of the debate surrounding Kilpatrick's amendment focused on the belief that China and Chinese companies do not "play by the rules" and, as a result, operate at an advantage over U.S. companies. In fact, shares of CNOOC are traded on both the New York and Hong Kong stock exchanges - two of the most prestigious exchanges in the world - which are well known to impose tough disclosure rules on listed companies. CNOOC has stated on numerous occasions that it wants to participate in the CFIUS process and will respect its outcome - making Kilpatrick's amendment all the more unfortunate.

There has also been considerable talk in Congress and across the United States about how a combined CNOOC and Unocal will be a threat to our national security. While national security issues cannot be brushed aside, the fact of the matter is that this is fundamentally a commercial transaction that says a lot about how the global economy works. Indeed, the United States should use the opportunity of China's wanting to invest here to press Beijing harder to  expand human rights, adopt free-market, pro-growth policies and privatization and to press it less on making the Chinese currency unstable.

When CNOOC decided to list itself on the Hong Kong and New York stock exchanges, it agreed to play by the rules of global capital markets - something most companies in China are unwilling to do. As a result, CNOOC cannot risk its reputation by making bad business deals or selling its products at an unprofitable price. Therefore, it makes absolutely no commercial sense for a Chinese company to extract oil and gas from the Gulf of Mexico and ship it halfway across the world when pipelines that reach every American consumer are a couple of hundred miles away.

Most of Unocal's gas reserves in Asia already are committed to Asian markets, such as Indonesia and Thailand, through long-term contracts that CNOOC will be required to honor. It is safe to assume that the global capital markets and the thousands of CNOOC investors will never allow CNOOC to break all those profitable contracts to sell gas to China at below market rates.

Another defining characteristic of the global economy is the free flow of money between countries - especially between the United States and China. In recent years American consumers have been buying goods made in China at an astronomical rate. In fact, the U.S. trade deficit with China is about $160 billion, and China owns approximately $230 billion in U.S. Treasury bonds. In other words, China holds a lot of American dollars. In addition, the United States makes heavy foreign direct investments in China. We own more factories and production facilities in China than they own here. The U.S. foreign direct investment advantage is even bigger than our GDP advantage: $12 trillion vs. $2 trillion - 6 to 1. At some point, we should expect and welcome China investing here.

So what will China do with the money? In the global market, money can be sent almost anywhere. So China can invest it in other nations - including places like Syria, Sudan and Iran - or it can invest in the United States.

We should do all we can to ensure China invests its money in the United States. Increased foreign investment is good for the economy. If CNOOC succeeds in purchasing Unocal, approximately $18 billion will come back into the this country. Also, CNOOC has committed to retaining all of Unocal's American employees. Chevron, on the other hand, has been deliberately vague when asked if it will keep Unocal's American employees if its bid for Unocal succeeds.

China represents a huge investment opportunity for American companies, and allowing Chinese companies to invest in this country will only help our economy grow. We should not fear closer economic relations with China and responsible Chinese companies such as CNOOC. Instead, we should welcome the opportunity and use it to our advantage.