Friday, June 24, 2005

The Pinstripe Peril

The real story of CNOOC's bid for Unocal is Wall Street's hopes for a China-driven M&A binge. But that's probably not the story that's going to make it to the front page.

Commenting on the CNOOC bid for Unocal, I think the LA Times editorial Oil for China gets it just about right in saying:

Not long ago, China was a net exporter of oil, but its growing need for imported oil is one reason crude is trading at $60 a barrel. As the nation emerges from poverty into the global middle class, it is natural that China's consumption of global resources starts mirroring its one-fifth share of global population.For well over half a century, ensuring sufficient reserves and a steady flow of oil has been a cornerstone of U.S. foreign policy. China now has to think in similar ways. Rather than leading to a zero-sum showdown, this affinity of interests between the two nations, if handled properly, could strengthen the relationship

(Kudos, also I think, for inserting an implied reference to Alice Hobart's classic novel of civilizing China through the petroleum derivatives trade, Oil for the Lamps of China).

Anyway, the LA Times is right, as in how things should be. Not necessarily right, as in the way things are.

China is pretty much committed to the win-win scenario of globalization, but the Bush administration isn’t.

Washington, relying on the supposed trump card of unanswerable military might, has been eager to push the world in general, the Middle East in particular, and the Far East in principal, into the zero-sum realm of confrontation.

Having said that, the Bush ideological force is weak and the GOP business force is strong nowadays, so I don’t think that the Bush administration will find much high-profile encouragement or political profit in fanning the fear of the Yellow Peril on the issue of Unocal.

In the LA Times initial coverage of the CNOOC bid, I found the last paragraph to be the money i.e. key quote:

CNOOC's financial advisors on the offer include the U.S. investment firms Goldman, Sachs & Co. and J.P. Morgan Securities.

Wall Street is deeply committed to the CNOOC bid.

You can see it in the impeccable PR work highlighting CNOOC’s Westernized, responsible capitalist credentials, culminated in Don Lee’s front page wet kiss in today’s LA Times, Chinese Firm Has American Accent.

The news and business page coverage reflect sophisticated spin of CNOOC's good-buty-just-not-good-enough bid—presumably by Unocal and its advisers, but also reflecting the hopes and dreams of arbitragers—meant to encourage CNOOC to bump its price, Chevron to improve its offer, and to provoke a profitable bidding war if possible.

The Chinese acquisition binge is not--at least not yet—part of a systematic Chinese government strategy to shift out of T-bonds.

It’s driven by financial considerations—and abetted by U.S. investment bankers.

The U.S. stock market is pretty moribund these days. The hi-tech bubble has long since popped, the hot money poured into real estate, and a nasty combination of high oil prices and the collapse of the Social Security private account soufflé mean that there is going to be a dearth of domestic enthusiasm or money directed to Wall Street.

Who’s got a lot of US dollars lying around available for M&A?

The Chinese, of course.

As such, they are simply filling the historical role of eager foreign investors in the American-dream-for-sale, as the English were in the 19th century, and the OPEC sheikdoms and the Japanese did in the 1970s and 80s.

At least to date, this move doesn’t reflect a systematic plan by the Chinese government.

CNOOC and Haier (the Chinese company that recently bid for Maytag) are signature independent business companies by Chinese standards. Haier isn’t even state-owned. They would be the least likely and effective tools for government-directed recycling of excess US dollar assets.

What we are seeing is Wall Street’s attempt to initiate a Chinese M&A binge.

If you worry about the continued hollowing out of the American economy and shifting of its assets overseas, you can point your fingers at Wall Street—the pinstripe peril—and not the Chinese.

The events of the next few weeks will show if a combination of Chinese caution, American paranoia, and Bush administration hostility can stem the tide.


earl said...

A win/win would be nice in the oil markets, but it would be unusual for that kind of sense to prevail. I heard T Boone Pickins on a program yesterday mentioning a 4 million barrel gap in the 4th quarter between supply and demand. I can already hear the neanderthals in congress screeching.

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