China, in the long run

June 27, 2005

NEWS LAST week that a Chinese state oil company, CNOOC Ltd., had launched an $18.5 billion takeover bid for a California oil company, Unocal Corp., predictably triggered a spasm of shock, anxiety and China-bashing on this side of the Pacific. In Washington, calls rose for holding up the deal on national security grounds, and added urgency was given to mounting concerns about China's resistance to revaluing its currency, its role in U.S. job losses, its ballooning trade surplus with America and its military buildup.

The potential takeover sharply highlights the growing stresses from China's rapid emergence as a global economic player, and there is indeed a lot to be worried about. But it is hardly a surprise. With China's oil imports soaring and oil hitting $60 a barrel last week, Beijing has been on a worldwide buying spree, trying to lock up oil and other resources to fuel its hot growth. Moreover, global integration has to be a two-way street, and China's U.S. purchases (including IBM's personal computing business and possibly Maytag) pale against U.S. ownership of Chinese assets. Anyway, what do Americans expect China to do with its more than $600 billion in hard-currency reserves -- keep investing in Treasuries at 4 percent?

China, though a one-party dictatorship, is not the monolith imagined by many Americans; beneath the aggressive veneer of an emerging powerhouse is a universe of conflicting pressures and deep instabilities. At the same time, Beijing manages to stay pragmatically focused on its national interests over the long haul -- in this case, now moving to turn dozens of its top state companies into global players through the acquisition of assets, distribution channels and brands. And that is the lesson here.

Contending with the rise of China is the greatest long-term challenge for the United States, and in contrast to Beijing, the reaction to the Unocal bid underscores the great degree to which Washington does not pursue anything resembling a plan. Instead, America lurches between embracing China and threatening punitive responses to the crisis of the month, whether economic or political. This week it's oil in the forefront, last week it was the currency problem, and before that it was Chinese military spending and the recent flood of Chinese textiles.

CNOOC's bid for Unocal is not as troubling as is the sense that China is acting in accord with its interests while the United States is merely reacting each step of the way -- and often aimlessly, at that. What is the U.S. plan for coping with China in the long run?

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