This earlier post addressed the folly of developing a mercantilist governmental policy in response to the China National Offshore Oil Corp.’s hostile takeover bid for Unocal, which had previously accepted Chevron Corporation’s friendly bid for the company. In this OpinionJournal op-ed, CNOOC, Ltd. chairman and CEO Fu Chengyu takes up that line of thinking in arguing that CNOOC’s bid is actually good for American business interests and poses no threat to those those interests or American security.
In the meantime, in this post, Brad Stetser, senior economist for the boutique firm Roubini Global Economics, has been thinking about the CNOOC bid in the context of the amount of foreign assets that the Chinese accumulate each month by exporting more than they import. Mr. Stetser estimates that the value of those assets is around $20 billion, which is more than the $18.5 billion that CNOOC is bidding for Unocal. Thus, Mr. Stetser notes that it’s a tad absurd to worry too much about the Chinese buying one second tier oil & gas company when the real issue is that China has become the largest creditor of an increasingly leveraged U.S. economy. Stated simply, it doesn’t make sense to object when Communists want to buy U.S. companies, but sell away when the same Commies offer to buy U.S. debt.

Mr. Stetser estimates that China holds $700-750 billion in foreign reserves, and that about 66-80% of that amount is in U.S. dollars. Moreover, Mr. Stetser projects that China will add at least $250 billion to its foreign reserves over each of the next two years. Thus, it is only natural that China would want to diversify its reserves by investing in companies such as Unocal and Maytag rather than just holding Treasurys. Inasmuch as such investments are harder to unload than Treasurys, such investments are good from the standpoint that it is less prone to economic upheavals that could negatively impact the U.S. economy.
Nevertheless, the level of Chinese reserve accumulation and intervention in the global exchange markets is unprecedented, and Mr. Stetser notes that China’s economic policies are challenging the norms that govern international economic relationships. CNOOC’s bid for Unocal is important because it calls attention to the larger issue of how the U.S. has leveraged future earning flows and now must begin servicing that indebtedness. Thus, rather than focusing on CNOOC’s bid to overpay for a second tier U.S. oil & gas company, the real issue that needs to be addressed in Washington is whether it’s in the U.S. national and economic interests to continue being a massive debtor to China. Washington Post columnist Robert Samuelson echos these thoughts in this timely op-ed from today’s edition.