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China’s Hypocritical Energy Stance By: Frederick W. Stakelbeck Jr.
FrontPageMagazine.com | Friday, November 18, 2005

An undeniable international energy race is now underway involving many of the world’s most powerful countries such as China, Germany, India, Japan and the United States. In particular, China’s need for oil has become extremely acute, forcing Beijing to act more deliberately by adopting a dual energy strategy.

The first part of this strategy calls for Beijing’s various state-run oil and natural gas companies to secure global energy resources regardless of cost, conflicting ideologies or existing geostrategic alliances. “China is indeed encouraging its companies to go overseas for long-term oil reserves.” said Jacky Choi of Value Partners located in Hong Kong. The second part of China’s energy strategy is equally important and involves the protection of state-controlled energy enterprises from foreign ownership, thus insulating mainland China from foreign economic and political influences.

This dual energy strategy was confirmed last month when British Petroleum (BP) and its chairman Lord Browne attempted to take a significant financial interest in China’s largest oil refiner and fuel marketer, Sinopec. Under the conditions of the proposed deal, BP would have traded access to certain oil and gas fields in return for an equal or majority stake in Sinopec which is 80 percent owned by the Chinese government.


If approved, Beijing would have become an equal or minority partner in a high-profile, state-run enterprise with national security significance; something the communist government was not prepared to do. “BP has misread what the Chinese want. They said no; they’ve said they’re not doing it,” one source close to the deal said.


Does This Sound Familiar?


Beijing’s move to protect one of its most treasured oil assets from foreign investors brings to mind comparisons of CNOOC’s failed bid to purchase U.S. oil company Unocal in June. At that time, Fu Chengyu, the chairman and chief executive officer of CNOOC, stated that his company’s unsolicited $18.5 billion bid to buy Unocal would make him a “hero or a martyr."


It has made him neither. But Beijing’s recent protectionist actions regarding Sinopec do appear hypocritical. As time passes, it will become even more difficult to defend such actions, as the country attempts to meet commitments associated with its ascension to the World Trade Organization (WTO). Over the past several weeks, members of the European Union such as Britain and Germany, as well as U.S. Treasury Secretary John Snow, have vigorously called for China to open its markets to foreign investment.


China’s Hypocritical Stance


The Bush administration and members of the U.S. Congress took an unbelievable beating at home and abroad last summer for their stance regarding oil company Unocal. At that time, legitimate national security questions related to the deal were roundly criticized as protectionist attempts by U.S. hawks who feared China’s global rise and influence. Yet, China has essentially taken a similar protectionist stance with Sinopec, eliciting little debate in the international community. Why the lack of scrutiny?


The reason is quite simple -- the world community has come to rely upon China’s unprecedented economic growth for its own economic vitality. As a result, countries that normally would object to such protectionist actions have remained eerily silent for fear of offending a rising China. This position of tacit appeasement, however, has created a dangerous precedent that if permitted to continue, will certainly challenge the basic principles of free enterprise. In essence, an acceptable double standard will be created exclusively for China. By looking the other way when Beijing violates the very same open market principles it publicly espouses to support, the global economic system is compromised.


In response to the failed Unocal bid, the Chinese foreign ministry released a statement in July saying, “We demand that the U.S. Congress correct its mistaken ways of politicizing economic and trade issues and stop interfering in the normal commercial exchanges between enterprises of the two countries.” Recent protectionist actions taken by Beijing involving BP and Sinopec make these statements all the more hypocritical.


If a country such as China wants to play in the international chess game of investments, acquisitions and mergers, it must be prepared to lose some of its own treasured pieces. So far, China has not accepted this reality.


Beijing Must Change its Protectionist Ways


The expansionist position of China’s energy companies will likely persist and even expand. Likewise, the desire of foreign energy companies to enter the Chinese market will also gradually increase. Today, over 16,000 American companies conduct business in China with more companies waiting on the horizon. As this footprint becomes deeper, so too will the desire of American companies to own valuable Chinese assets.


Recent purchases by foreign companies of Chinese assets in the construction and railroad fields are positive signs, but these industries lack the national security impact that oil holds. In this regard, China must quickly open its markets to competion and possibly foreign ownership of assets in more sensitive industries. Impassioned arguments by China proponents that Beijing now realizes that it must play by the rules of the international market remain largely unproven.


It is becoming clear that Beijing wants to maintain control over strategic assets in order to build global dominance in core industries such as energy, financial services, technology and manufacturing. Why? This will allow Beijing to influence the geo-political landscape for decades to come. To the Chinese, Western-styled market competition and investment are acceptable - to a point.


During a recent hearing of the U.S. Banking Committee, Senator Charles Schumer (D-NY) suggested that U.S. legislation be amended to require “reciprocity” involving foreign acquisitions. “In other words, if a Chinese company is seeking to purchase a U.S. oil company, than a U.S. company must have the right to purchase a Chinese oil company. U.S. companies are being blocked from such purchases and have not made a fuss for fear of being locked-out of the Chinese market,” Schumer said.


Could an American oil company one day purchase a Chinese owned oil company like CNOOC? If you believe that, I have an oil well in beautiful downtown Beijing to sell you.


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Fred Stakelbeck is a Senior Asia Fellow with Washington-based Center for Security Policy. He is an expert on the economic and national security implications for the U.S. of China's emerging regional and global strategic influence. Comments can be forwarded to Frederick.Stakelbeck@verizon.net.

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