Unocal Bid Tests U.S.’ China Ties

The controversy over a Chinese oil firm’s bid for Unocal Corp. has obscured another key development: American companies are accelerating efforts to buy or invest in Chinese businesses. But those American firms now fear a backlash amid heightened U.S.-China trade tensions.

U.S. corporations are plowing billions of dollars into shares or outright control of Chinese companies in industries as varied as beer, banking and biotech.

The surge reflects Beijing’s easing of restrictions on foreign ownership, as well as American executives’ conviction that they simply must be in China’s booming market.

“For us, it’s not just a place to manufacture. It’s turned into a substantial market,” said Christopher Adams, Eastman Kodak Co.’s chief China representative in Beijing. Kodak has invested well more than $1 billion in China, and its 9,000 stores dot the nation, already Kodak’s No. 1 market for roll film.

Last year Anheuser-Busch Cos. paid $720 million to take over Harbin Brewery, which dominates China’s beer-guzzling northeast region. Amazon.com Inc. spent $75 million for Joyo.com, China’s largest online seller of books, DVDs and CDs. And private equity firm Carlyle Group agreed to put up $400 million for a 25% stake in China Pacific Life Insurance Co.

But the strong U.S. political opposition to state-owned CNOOC Ltd.’s $18.5-billion offer for El Segundo-based Unocal has highlighted the tense commercial relations between the two nations. Members of Congress have railed against the CNOOC proposal as a Beijing-orchestrated grab for valuable oil resources and have threatened to block the deal on the grounds of national security. The Chinese government has warned Washington not to interfere.

The standoff has raised fundamental questions about trust and fairness, how the U.S. will approach China’s rising economic influence and how Beijing will respond.

If CNOOC’s bid is thwarted by Washington, analysts say, it will almost certainly trigger a reaction that could prove costly for American businesses.

The Chinese could cut purchases of U.S. goods, as when Beijing protested an American arms deal with Taiwan by ordering aircraft from Europe’s Airbus instead of Boeing Co. The Chinese also could delay approvals of American projects in China, analysts say, or add a few more hoops to the complex procedures for clearing acquisitions by foreigners.

Such moves, though, could also hurt China. If Beijing pulls back from two decades of opening up its markets, it could hamper China’s economic development and political reforms. Chinese companies crave not only U.S. cash but the management and technical know-how that investments and joint ventures bring.

“China has come a long way from pure state ownership to gradual private ownership and foreign ownership,” said Rupert Li, a partner at Morrison & Foerster’s mergers and acquisitions law practice in Hong Kong.

Liu Baocheng, dean of Sino-U.S. studies at the University of International Business and Economics in Beijing, doesn’t think the outcome of a single deal such as CNOOC-Unocal will impair long-term relations between the two countries. Still, he sees the American response to CNOOC’s bid as a litmus test of their current standing and what may lie ahead as China asserts itself in the international marketplace.

“This might reveal the true face of the U.S.” toward China, Liu said.

Even before CNOOC lobbed its bid, strains in U.S.-China trade had been building for months. China’s soaring textile exports prompted the Bush administration to impose new quotas. Several bills in Congress threaten tariffs on Chinese goods if Beijing doesn’t revalue its currency, which critics say is undervalued, giving Chinese exporters an unfair advantage. American industries complain about lax protection of intellectual property rights in China.

Some of those issues will be discussed today by top officials from the U.S. and China meeting in Beijing for annual trade talks.

For the Bush administration, the CNOOC matter is particularly difficult. On one hand, the bid is being seen against the backdrop of America’s huge trade deficit with China, which is increasingly blamed on allegedly unfair Chinese trade practices. On the other hand, free trade advocates argue that it would be hypocritical for U.S. politicians to derail a deal when there isn’t strong evidence that it threatens American security interests.

Some of America’s largest corporations, including Exxon Mobil Corp. and Bank of America Corp., have urged politicians not to interfere -- and for no small reason. Bank of America last month agreed to pay $2.5 billion for a 9% stake in one of China’s largest state-run banks and has an option to buy much more. Exxon just last week signed a $3.5-billion deal with another Chinese oil company and a Saudi concern to expand a refinery in south China.

And Goldman Sachs is considering an investment in China’s largest bank, according to various reports.

“Almost every major company is here and making money or wanting to make money,” said Andy Rothman, a China specialist at CLSA Asia-Pacific Markets in Shanghai. “They don’t want to spoil this.”

U.S. corporations have been investing in China for years, setting up joint ventures or wholly owned enterprises, mainly to take advantage of China’s cheap manufacturing base. But the pace of American investment activity has jumped in the last two years, with pledged investments exceeding $12 billion in 2004, after running in the $6-billion to $8-billion range from 1992 to 2002, according to the U.S.-China Business Council.

It’s unclear what share of total investments involved mergers and acquisitions, but those deals are proliferating as more Chinese businesses mature and Beijing continues to divest state-owned assets and open various industries to greater foreign ownership, under its obligations for joining the World Trade Organization in 2001.

New regulations last December allowed foreigners to buy shares of Chinese insurance and media companies. China’s huge retail sector also became completely open to foreign ownership, although U.S. businesses complain that Beijing has been dragging its feet in liberalizing wholesale and distribution activities.

Some sectors are restricted. Foreigners can buy only as much as 20% of banks and as much as 50% of telecommunications and life insurance businesses.

And one notable industry remains closed to foreigners -- energy, which is under state control. That’s prompted some to ask: Why should CNOOC be allowed to buy Unocal when a bid by Unocal for CNOOC would be a nonstarter?

But many others point out that it’s less an issue of fairness than what the respective laws of the two nations permit. The U.S. allows such an acquisition, whereas China doesn’t.

“To say, ‘You can buy us, but we can’t buy you’ ignores the overall context in which these companies operate,” said Steve Chu, a principal at Strategic Impact Group in Shanghai, which provides investment funds and advice. By and large, he said, foreign investment in most Chinese industries, including state-owned enterprises, is quite open. The Chinese intended it that way to develop their economy and push domestic companies to become more competitive.

That’s a significant difference from Japan in the 1980s, when its economic rise also triggered a backlash in the United States. Many U.S. politicians complained that Japan’s markets weren’t open and Japanese companies weren’t receptive to takeovers by foreigners, a pattern that persists today.

Many Chinese are eager to sell out or join up with a foreign partner. Just last week, American eye-care firm Bausch & Lomb Inc. said it had agreed to buy a 55% stake in Shandong Chia Tai Freda Pharmaceutical Group for $200 million in cash.

“We want to get money for other investments,” said Stephen Tse Hsin, executive director of Sino Biopharmaceutical, which owns Shandong Chia.

What’s in it for Bausch & Lomb? A known brand in China, hundreds of sales staff members familiar with eye products, distribution channels at 1,000 hospitals and shelf space at just about every major pharmacy in the country. “If they build their own, it might take them even 10 years” to establish a presence like that, Hsin said.

Chinese companies are now starting to venture abroad themselves. Recently, they have sought to buy established brands, illustrated by Lenovo Group Ltd.’s $1.25-billion purchase of IBM’s personal computer business and appliance maker Haier Group’s interest in buying Maytag Corp., reportedly for $1.3 billion.

“The trend is clear: The Chinese are going to buy more companies” in the U.S. and other countries, said Liu of Beijing’s University of International Business and Economics.

Will that be met with resistance? “If there’s a perception from the Chinese that they don’t have the same opportunities abroad, that could create a backlash here,” said Jeffrey Bernstein, chairman of the American Chamber of Commerce in Shanghai. The American economy can’t afford that, he said.

“U.S. companies need to take a strong position in the Chinese market. It’s going to be a strong component of the economic engine.”