HONOLULU (July 15) -- The recent bid by China National Offshore Oil Corporation (CNOOC) for Unocal heralds the beginning of a long-term wave of Chinese investment in U.S. companies, predicts an East-West Center specialist on the economies of the Asia Pacific region.
"We have a country of 1.3 billion people with annual economic growth of 7 to 10 percent. As the incomes of Chinese consumers rapidly increase, they will want to buy both risky Chinese securities and more secure American securities for their personal portfolios," said Sumner La Croix, an economist and senior fellow in the research program at the Center. "We see the same behavior with American investors who purchase foreign assets to balance their portfolios."
"When it comes to China-U.S. economic relations, the rapidly growing interdependence between the two countries is striking," he said at a public program this week in Honolulu. "The two economies are becoming more and more linked and this will lead to new opportunities for businesses on both sides of the Pacific Ocean and to trade and investment controversies that will require close attention by both governments."
These links include the dramatic growth in Chinese exports to the U.S., a fixed exchange rate that has generated controversy, particularly in Washington; a growing U.S. trade deficit with respect to China; loose Chinese enforcement of intellectual property rights on U.S. products; and foreign investment by U.S. companies in China and, more recently, by Chinese companies in the U.S.
In June the Chinese state-controlled oil company made an $18.5 billion offer for Unocal, outbidding Chevron, a major U.S.-based oil company, by roughly $2 billion. Anti-China sentiments in Washington intensified, with critics charging that a CNOOC purchase threatens national security and U.S. energy interests.
La Croix believes that the Unocal bid has few national security implications and should be welcomed by U.S. policymakers. The bid reflects "good old-fashioned American capitalism spreading to China. China is accumulating dollars because of its recent trade surpluses with the U.S., and the Chinese government and Chinese businesses are exchanging the dollars for more productive U.S. assets, such as U.S. businesses and U.S. Treasury bonds," he said. "This is likely to be the start of a long boom in the purchase of U.S. assets by Chinese investors and companies."
Despite pressure from Washington for China to revalue its currency, La Croix does not see any clear current advantage in pushing Beijing toward more flexible exchange rates. "If we push for a revaluation of the Chinese currency and this leads to a crisis in the fragile Chinese banking system, this could lead to an economic crisis in China," he cautioned, which would have a sizable ripple effect on the U.S. and global economies.
He suggested that China keep its fixed rate peg with the dollar and announce a 15% appreciation of the yuan against the dollar. "The higher-valued yuan would help to stimulate sales of U.S. goods in China and to slow down a Chinese economy that is in danger of overheating," he said.
La Croix forecasts a growth rate of 7 to 8% in China over the next 15 years -- doubling the size of the Chinese economy every 10 years -- unless a major international crisis cuts off Chinese exports from its markets.
"The growing interdependence of China with the U.S. and other markets worries many U.S. policymakers but is really a very positive development," he said. "It provides the Chinese government with clear incentives to participate in international efforts to maintain the health of the world economy and to resolve economic and political crises in the Asia Pacific region. China's need for prosperous, stable trade partners in Asia may help to ensure that as it becomes more of a regional leader, it will act responsibly."
Sumner La Croix can be reached at (808)944-7508 or lacroixs@eastwestcenter.org