November 22,2009

Hu and Obama ?Following the Poor Example of History

By CT Johnson

"We do not have the slightest need of your country's manufactures.  We possess all things in prolific abundance and lack no product within our borders.  There is therefore no need to import the manufactures of foreigners in exchange for our own produce."


So said the Chinese Emperor Qianlong to the British Lord Macartney, who had come to China in 1793 seeking a solution to Britain's massive tea-driven trade deficit with the Celestial Kingdom.  Lord Macartney, who brought such technological wonders as a spring-suspension coach and mechanical planetarium to tempt the Chinese court, was told by Qianlong that "we have never valued ingenious articles," and sent empty-handed back to Britain. 

The joint statement issued by Hu Jintao and Barack Obama following the US President's visit to China is far more evenhanded than Qianlong's edict, but China's outbound investment activity suggests that Chinese sentiment toward the US is similar to the Emperor's 18th century view of Britain's commercial wares.

The joint Chinese-American statement was a tidy reflection of China's current outbound investment priorities.  Of 4,227 words in the statement, 1,117 are devoted to energy issues (which have dominated China's foreign commercial strategy for the past few years), while only a combined 176 words were given toward technology, civil aviation and agriculture (three areas where the US has a leading commercial position).  Clean vehicles, one of China's few areas of technological dominance, by itself commanded 114 words.

All of which echoes the trend of recent outbound investments by Chinese companies.  Out of the $15B in high-profile overseas investments made by Chinese firms this year, almost $13B was made on energy acquisitions.

Recent Chinese interest in US companies has centered around petroleum assets in the Gulf of Mexico, notably those of privately owned Devon Energy.  On November 16, the New York Times reported that China National Offshore Oil Company (CNOOC) was the leading candidate to buy Devon's properties in the Gulf.  The purchase is expected to bring Devon between $4.5B and $7.5B in proceeds. 

"We do not believe that the value of our high-quality Gulf and international assets is being adequately reflected in our stock price," J. Larry Nichols, Devon's chief executive, said that same day. "By monetizing these assets, we will realize their full value, allowing us to unleash the growth potential that resides within our world-class onshore assets."

CNOOC recently shocked the US energy industry by purchasing stakes in a number of petroleum production leases in the Gulf of Mexico from Norway's Statoil.  This was the first time that a Chinese company had taken an ownership interest in US energy assets. 

"This type of cooperation is very common. Through that, the two companies can make full use of each other's advantages, share risks and profits," CNOOC spokesman Xiao Zongwei told Dow Jones Newswires.

This marks a significant shift in both CNOOC's strategy and the US government's view of Chinese state-owned enterprises playing in the domestic energy arena.  Previously, CNOOC tried to enter the US energy market via large-scale purchases.  This strategy culminated in CNOOC's $18.5B bid for American oil company Unocal, a deal that collapsed under pressure from Congress over concerns about US energy assets falling under the control of a Chinese state-owned enterprise.  The Statoil purchase seems to signal a change in position on both sides of the Pacific.

Hu and Obama's concentration on energy matters mirrors China's preoccupation with its own energy security.

The other major area of Chinese investment in the US, finance and investment firms, was notably absent from the joint statement.  This is all the more interesting given reports that Chinese and US banking regulators are working on a deal to allow Chinese banks to invest in their US peers.  Such a deal would make sense from a number of perspectives. 

First, small- and medium-sized US banks have suffered tremendous capital outflows because of the financial crisis and desperately need additional backing to remain solvent.  Chinese banks, by contrast, are awash with cash and in need of a place to put it.  Investing directly in US banks cuts out the middle man involved in buying US Treasuries (which provide the Federal Reserve with cash which the Fed then lends to US banks). 

Second, Chinese investors are comparatively quite familiar with US financial investments, making banks a natural target for Chinese money. 

China appears, however, to be uninterested in America's other investment opportunities.  Despite America's dominance in computers, software and internet technologies, not since Lenovo's purchase of IBM's personal computer division in 2004 has a Chinese company acquired a major US technology firm.  Likewise, Chinese firms have shown little interest in other areas of US innovation, including entertainment, aviation, agriculture and services.

All of which is a problem for the US.  America has failed to interest China in those things it has to sell, namely innovation, subject matter expertise and services.  Instead, President Hu and President Obama have reinforced the view that, provided the appropriate raw materials, China will continue on its upward path toward greater prosperity. 

While this may be true, it misses the point that both would accomplish more by seizing the opportunities presented by their complementary and comparative advantages.  China is the world's greatest producer, a country that has shown a genius for making things efficiently and well.  America is the world's leading innovator, a nation of entrepreneurs bursting with invention.  It would be a shame for the world's two greatest powers to follow the poor example of Emperor Qianlong and Lord Macartney and miss the advantages of cooperation and mutual benefit. 

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