HK can be Chinese SOEs' gateway to assets in the West
Updated: 2012-09-05 05:55
By Ho Chi-Ping(HK Edition)
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The big energy news over the past month has been the proposed takeover of Nexen Inc, Canada's No 5 oil producer, by China National Offshore Oil Corporation (CNOOC). CNOOC is China's third largest oil company and one that focuses on offshore energy exploration and development.
The deal is worth $15 billion, making it the largest foreign purchase by a Chinese firm. It was formally submitted to the Canadian government for approval last Wednesday, with CNOOC promising jobs and investments galore, a new North American headquarters in Calgary, a listing on the Toronto Stock Exchange, and a sale price for Nexen that would leave lucky executives and shareholders laughing all the way to the bank.
Government and industry sources familiar with the deal say if the simple sale of Nexen to CNOOC were the only consideration, federal approvals would be hardly more than a formality. But inside Canada's Conservative government, sources say there are growing concerns that approving such a huge takeover could open the door to a shopping spree for other Canadian energy companies by a cash-rich, resource-thirsty and "undemocratic" China. Canadian authorities are worried that the Nexen deal could become the regulatory template for China's purchase of other oil companies at the core of Canada's economic engine. How could the Canadian government say "yes" to the sale of Nexen and "no" to others?
However, it is important to remember the last time a similar deal came before regulators. In 2005, CNOOC offered to buy Unocal, an American oil company, for $18.5 billion. The bid was soon mired in political criticism, as hearings in the US Congress argued that the takeover threatened American national security. After a protest vote in Congress against it, CNOOC withdrew the bid.
Worries about the Nexen deal in the North American press seem to center on two different concerns, both related to CNOOC's status as a State-owned company. First, State-owned companies are seen to be opaque and economically inefficient. Second, politicians fear that CNOOC is a tool of an ambition by the Chinese government, which they suspect underlines an ambition towards energy dominance. As the Unocal bid was debated in the US Congress, one accusation thrown around was that the technology used to map underwater oil deposits may eventually benefit Chinese submarines.
These concerns stem from the lack of trust Western politicians and regulators have in China's State-owned companies. They do not trust these companies to be efficient, believing that they will allocate resources according to political concerns, rather than market forces. They do not trust them to be transparent, believing that the Chinese legal system is too weak to allow proper oversight. And, finally, they do not trust these companies to be "objective", worrying that companies like CNOOC are secretly getting their orders from the Chinese military.
At their most extreme, these arguments are clearly ridiculous, and are likely just bluster to win political points. However, there are some grains of truth in these concerns. Certainly many aspects of the Chinese economy, such as the rule of law and the accountability of its businesses, have yet to reach the international standard.
China's "going out" strategy involves large amounts of outward investment in natural resources around the world. Most countries welcome this investment: it provides a much-needed source of foreign cash, with almost no strings attached, and is often pegged to the construction of sorely-needed infrastructure. In fact, only developed countries seem to see nefarious motives in China's outward investment. That same outward investment, in fact, brought considerable benefits to Africa with the construction of the continent's railway network, and related transportation infrastructure, among other things, starting some 30 years ago.
Ultimately, the developed world still does not trust China. This benefits nobody. China loses out on a new source of resources and the developed world loses a huge source of foreign investment; neither side wins when the developed world feels that it cannot trust Chinese companies.
Hong Kong can help resolve this problem. Western countries trust Hong Kong: they appreciate the sophistication of its institutions and its rule of law, they recognize the strength and diversity of Hong Kong's markets, and view the actions of its companies as apolitical. Ventures from the city are treated seriously, and are not derailed by needless politicization. After all, no one questioned Li Ka-shing's purchase of Husky Oil, another Canadian oil producer.
Hong Kong can act as a middleman between Chinese State-owned enterprises and possible assets in the West. Ventures based here will be subject to stronger Hong Kong legal regulation. And, if the Chinese central government is willing to give up some control over the foreign aspects of its State-owned businesses, such ventures can even allow themselves to be floated on the stock market, bringing them fully under shareholder oversight. All of these will help counter the accusations that Chinese State-owned companies are opaque, politicized and inefficient.
Instead of just being the West's gateway into China, perhaps Hong Kong can also become China's gateway to the West?
The author is former secretary for home affairs of the HKSAR government.
(HK Edition 09/05/2012 page3)