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Congress should not deny market forces
2005-08-08
China Daily
The latest attack on private property launched by the United States' Congress has come at the expense of Unocal shareholders, who have lost at least US$1 billion because of CNOOC's decision to drop its bid, not because of market forces but because of political pressure from Capitol Hill.
Chevron is the clear winner, with its bid of US$17.6 billion, but the damage done to US-China relations and to the free flow of investment funds in global capital markets could be substantial.
By politicizing the takeover market and weakening the private property rights of Unocal's shareholders, Congress is violating the very free market principles it is supposed to uphold.
There was absolutely no national security threat from the Chinese takeover bid. Yet that bogus risk was used to justify treating Unocal as a public asset rather than a private firm with the right to conduct its own business.
In a letter to Unocal's board, Peter Schoenfeld of P. Schoenfeld Asset Management, which controls a block of Unocal shares, wrote: "It is your duty to maximize value for stockholders." Indeed it is. But Congress's hysterical China bashing and its ignorance of global energy markets have compromised that responsibility.
Even without a legal prohibition on a deal, Congress can intimidate a foreign company like CNOOC by imposing considerable costs on the takeover process and using the secretive Committee on Foreign Investment (CFIUS) to foster uncertainty.
That is not to say we should let foreign companies have totally free access to US assets. In some cases, especially in the area of sensitive technology with military applications, there may be legitimate risks. Going through a government vetting process would then be warranted.
That was not the case for CNOOC, however. By bringing Congress into what should have been a private transaction, Washington abused its power and may jeopardize US business interests in China.
CFIUS, which is chaired by the Secretary of the Treasury, investigates foreign investments and recommends presidential blockage of those that pose legitimate national security concerns. But the review process is far from transparent and leaves considerable discretion for determining what constitutes a credible threat.
With the bulk of Unocal's oil and natural gas operations in Asia and with its US production accounting for less than 1 per cent of US consumption, it is difficult to see how the committee could have found "credible evidence" that the proposed takeover would have posed a security risk.
It is a grave mistake to use the national security card to deny Chinese firms the right to purchase natural resources in the open market when there is no credible threat.
On June 30, a non-binding House resolution recommending presidential review of the proposed takeover of Unocal was passed by 398 votes to 15. In a letter to President Bush, House Energy and Commerce Committee Chairman Joe Barton declared: "We urge you to protect American national security by ensuring that vital US energy assets are never sold to the Chinese Government."
The reality is that globalization, financial innovation and the information revolution have made energy markets highly resilient. Oil is fungible and will flow to the highest bidders.
Over time, production and consumption will respond to higher prices as producers search for new supplies and consumers conserve and switch to cheaper alternatives.
If the US Government interferes with the market process, future production will suffer, and US energy companies will find it more difficult to operate in foreign countries.
If Beijing wanted to provide "cheap credit" using part of its US$711 billion in foreign exchange reserves to help CNOOC purchase Unocal, that would have been a gift to US shareholders not a concern for Congress or US energy security.
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