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Jewish World Review June 29, 2005 / 22 Sivan, 5765

Amity Shlaes

Amity Shlaes
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The China Bet Is Off | US concern about China is not going to go away. Haier may buy Maytag and China National Offshore Oil Corporation may manage to snatch up Unocal. But such bids have lawmakers and the nation as a whole reconsidering China. Observers tend to explain this by saying "America is becoming protectionist."

But what is actually going on is subtler. Many years ago, the US made a bet about China. The bet was that what mattered was trade. Trade concessions negotiated by Washington were therefore important. But the bet was also a bet by average citizens, made alone in their living rooms after dinner. Americans chose to overlook the Chinese form of government, the limits China placed on commerce, Chinese arms sales, China's Taiwan policies — nearly anything — in the faith that trade in the end would pull China forward. Trade would make China democratic and entrepreneurial. Trade would set China free.

Now Americans are questioning their old bet. Some of their questions are not justified. But others make sense.

Start with the fears about the bids. Maytag, an old appliance maker, is one of the brands Americans love best. What good, some are asking, can come of acquisition by the "price is all that matters" Chinese? The Chinese do not want Maytag, the critics say. The Chinese just want a place to put their dollars.

That part about the dollars may be true. But it is also true that Haier's interest may be good for Maytag. For the move represents Chinese recognition that brands do matter, at least a little bit, after all. Just last month, many critics of China were charging that the Chinese would never buy anything they could not sell in a nanosecond. Yet Haier wants to buy Maytag. And it takes a lot longer than a nanosecond to negotiate an acceptable price for a block of stock in a company with as many legacy costs as Maytag has.

Then there is CNOOC's Unocal bid. Here the critics speak of a Chinese business swallowing an American one. The reality is, again, more complicated. Something like half of Unocal's reserves are in Asia. Americans can buy a piece of CNOOC by purchasing its US depositary receipts on the New York Stock Exchange. Nationality of ownership may not matter any more in cases like CNOOC's.

Then there is the complaint that China is driving up the oil price and "taking US energy". Both are true — but growth anywhere does that. Besides, China needs the energy to continue growing. If China keeps growing, then China will remain a relatively unthreatening presence at the world table. Those, at least, are the terms of the old China bet.

Which brings us to the current mood. Many Americans feel that the Chinese government looms too large in all these transactions. Haier's chief executive has referred to the company as a "collective", as opposed to being state-owned. But the government still owns much of Haier. Before Haier there was the Lenovo purchase of IBM businesses — Lenovo is state-controlled. As for CNOOC, the government owns 70 per cent. If Lenovo, Haier or CNOOC were private companies, their acquisitions would trouble Americans less. But US citizens are not comfortable with the idea of the Chinese public sector buying up the US private sector.

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Nor should they be. While the nationality of companies matters less and less, state ownership still matters. There is something anachronistic and disturbing about an economy of China's size operating under an authoritarian government. Most Americans never expected that China would still be this autocratic by the time it became this rich. Perhaps the original bet was wrong after all? Just weeks ago, Microsoft accommodated the Chinese government and blocked the use of the phrases "democracy" and "human rights" on its Chinese portal. It is legitimate to ask whether a regime that is capable of convincing Microsoft to censor is also capable of putting oil to use in projects contrary to American interests. Especially given the fact that the same regime is buying up oil companies elsewhere.

Most of Washington's attention now will focus on the military and security aspects of the specific deals — keeping war-related aspects of Unocal "safe", upgrading diplomacy with China, and so on.

But the most efficient way to dispel US concern involves economics. The Chinese like the South Korean model of giant industrial conglomerates. But the most stable economic future for a country as important as China is as a nation of small- and medium-scale businesses that can expand to the point where they render the state giants irrelevant. A nation of traders and private companies is inherently less of a security threat than a corporatist giant.

But to grow, such businesses need reforms at home: new banks, stronger property rights, a more robust rule of law and more incentives to innovate. If China can make these changes in its business environment — or be helped to make them — it may evolve into the reliable partner everyone had hoped for. If it cannot, Americans will, increasingly, back legislation that suppresses Chinese growth. And that will not be because Americans have "become protectionist". It will be because they decide that the old China bet is off.

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JWR contributor Amity Shlaes is a columnist for Financial Times . Her latest book is The Greedy Hand: How Taxes Drive Americans Crazy and What to Do About It. Send your comments by clicking here.



© 2005, Financial Times