China's Unocal Bid Raises Political Red Flags

WASHINGTON – Deep misgivings about China's rising economic and political clout have helped fuel political resistance to a major Chinese oil company's bid to buy U.S. producer Unocal, experts said on Friday.

State-owned CNOOC Ltd.'s $18.5 billion bid for Unocal Corp. (UCL) on Wednesday, topping Chevron Corp.'s (CVX) roughly $16.4 billion offer, came under swift fire from U.S. lawmakers, who are calling for stringent investigations into the transaction even before a deal is reached.

The Unocal issue arises at a time of record oil prices, unease over China's $160 billion trade surplus with the United States and an appetite in Congress to punish China with tariffs unless it revalues its currency.

U.S. defense officials are embroiled in a debate over how to evaluate China's military. The Pentagon's annual report on China's military modernization has been delayed for weeks in an apparent dispute over how stark a picture to present.

Mikkal Herberg, an analyst at the National Bureau of Asian Research (search) in Seattle, said there were solid reasons to examine the financing of the Chinese firm's bid and ask whether it was a commercial transaction or an effort to corner oil supplies.

Unocal is the ninth largest U.S. oil and gas production company.

"But this combines with all these other concerns about China -- currency, trade deficit and other things -- to make another reason for China-bashing, which I'm worried about."

"If CNOOC wins the bidding war, then the government steps in and ultimately turns it down, that's going to be just a horrendous episode in U.S.-China relations," Herberg said.

Top U.S. officials assert that U.S.-China ties have rarely been better, with cooperation on anti-terrorism and in diplomatic efforts to end North Korea's nuclear arms programs. China is host of six-party talks on North Korea, which also include the United States, South Korea, Japan and Russia.

The administration of President Bush, who will meet Chinese President Hu Jintao (search) several times this year, has repeatedly staved off protectionism aimed at China.

Zheng Bijian, a Chinese Communist Party opinion leader, toured the United States last week and met senior government officials with the message that China was seeking a "peaceful rise" in its international position that would not challenge U.S. interests.

Brookings Institution scholar Kenneth Lieberthal, who handled China policy in the Clinton White House, said the political calm with China Bush enjoyed from the Sept. 11 attacks through his re-election was giving way to tension.

"The top leaders of both counties continue to want the relationship to work well, but the politics of the relations below the highest level are becoming tougher," he said.

"We are fully engaged and yet there is a question as to how much we can trust each other's intentions, so when politics become tougher in one capital, that underlying distrust on the other side gets more horsepower behind it," Lieberthal said.

China's dramatic emergence has added to long-term troubles, such as the status of Taiwan, over which Beijing claims sovereignty but which Washington supplies with defensive arms.

China's intensifying quest for oil to fuel its surging economy has led Beijing to embrace energy-rich countries the United States shuns, such as Iranand Sudan. If CNOOC does succeed, it would be the biggest overseas acquisition by a Chinese firm.

"They are paying a price for access to (oil) markets which may not be in anybody's interest, like providing the Sudanese and the Libyans with advanced weaponry," said Richard D'Amato, chairman of the U.S.-China Commission, which advises Congress.

Lieberthal said the Unocal bid marked a potentially good way for China to secure "non-rogue" oil supplies, and a rejection could drive the Chinese closer to the pariahs.

Some observers see hypocrisy in U.S. officials complaining about investment barriers in China but crying foul when Chinese firms want to buy U.S. businesses.

But Gal Luft, executive director of Institute for the Analysis of Global Security, said it would be "suicidal" at a time of $60-a-barrel oil for the United States to let a Chinese state-run firm control oil sources by buying Unocal.

"It's not the government of Japan or France," he said. "We want to think about the fact that an American company falls in the hands of the Communist government of China."