from Follow the Money

China was for buying Unocal before it was against it …

August 8, 2005

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This Saturday FT story made little sense to me, apart from an ex post attempt to save face.   Better for the Chinese government to say the CNOOC's bid failed because it did not have a ton of government support to begin with than to say that it failed even with the (at least passive) support of the Chinese government.

I certainly would not go so far as to say the government went to CNOOC and said "go buy Unocal."  CNOOC's ambitious CEO may have developed the idea on his own.  But I would be shocked if this deal did not have significant support inside the Chinese government. 

My bottom line: someone had to approve the financing.  

I do not know if the head of the Industrial and Commercial Bank of China (ICBC, a big state bank) could sign off on its share of the financing without consulting the top levels of the Chinese government.   But I do know that CNOOC's parent company had to get the money it was lending to lend to CNOOC from somewhere, and someone had to approve the financing.  Joe Kahn's reporting (alas, subscription now required) leaves little doubt that the head of the PBoC - Zhou Xiaochuan was deeply involved in arranging the overall financing package. 

That makes sense to me.  Chinese firms outward investment has been less than $5 billion a year recently.  $20 billion represents a quantum leap upwards in the size of outward Chinese investment.  Since China's capital account remains restricted, an outflow of that size would require approval.  

Not that the approval would be that hard to get.  The PBoC has made no secret of its desire for Chinese firms to keep more of their savings abroad, and to spend more of the dollars they earn abroad.  The PBoC doesn't really want their money right now.  It thinks (not surprisingly) that it has all the reserves it really needs.

Moreover, China's Foreign Ministry reacted rather strongly (and most unhelpfully) when the US Congress initially made noises against the deal.

China seems to have learned a few lessons in media management since then.  It wisely seems to be opting to let bygones be bygones.   No need to introduce a further complication to Hu's forthcoming visit to the US. 

Technical note: not all the $20 b needed for the big would be financed "inside" China; CNOOC also had access to external credit lines from its investment bankers.  I could explain the balance of payments accounting for all this, but it is not worth it.

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