Profits versus Politics
Thursday, June 30th, 2005
By George Leong, B.Comm. for Profit Confidential
Decades ago, the cold war pitted the Americans against the Russians in an epic arms race. That threat has since dissipated, but now Washington is concerned with the growing power of China.
The topic of the “red threat” is swirling at Capital Hill these days. China is on a superlative economic growth path, thanks to a very strong manufacturing sector and a low-priced Yuan. The pegged currency system, which Washington wants to eliminate, has helped to create a rising global economic powerhouse. China is growing at about 9% annually and clearly wants no changes that could alter the course of the country’s road to capitalism.
With the growth, China has become a major user of commodities. It is the world’s second biggest user of fossil fuels, after the United States. It also is a growing player in other key commodities, such as grains, lumber, copper, and steel. You can think of the country as a massive engine, needing constant fuel in the form of commodities. But here is the issue: China needs to go outside its borders to quench its rising thirst for raw materials. The country has traditionally sourced raw materials from other countries, but a recent shift in strategy has occurred and China has decided to look at acquiring companies in order to guarantee sources of raw materials and expand its influence worldwide.
I don’t see a problem with this new trend, but there is growing concern in Washington that China may be a security threat if it is allowed to acquire key U.S. companies.
In Canada, China-based Minmetals was in talks to buy Noranda Inc. (NYSE/NRD)–a major base metals producer–in an effort to gain access to a guaranteed source of metals. The reaction from conservatives in Canada was one of fear and concern that a “Communist company” would take over one of the country’s largest metals producers. I found the allegations simply ridiculous. I mean, what are the Chinese going to do, spread communism throughout Canada through metal production?
The same is now happening in the United States–driven by recent and proposed acquisitions by Chinese companies. China- based Lenovo acquired the computer business of International Business Machines Corporation (NYSE/IBM) when no one else wanted the company.
And now, Maytag Corp. (NYSE/MYG) is being pursued by China-based Haier Group and two U.S. private equity firms. The concern among the masses is that the CEO of Haier is in the ruling Communist Party’s Central Committee. Again, I can’t see Communism spreading throughout the U.S. through the sales of washing machines…
Washington may allow the Maytag acquisition, but the most recent bid for oil company Unocal Corp. (NYSE/UCL) by China-based China National Offshore Oil Corp. (NYSE/CEO) is turning a lot of heads in Washington right now. The $18.5- billion bid surpasses the $16.6-billion bid made by Chevron Corp. (NYSE/CVX). The bid by Chevron has been accepted, but the Chinese bid will be examined. Trust me, that means politics will play a big part in the decision.
The bid from China National will need to receive a blessing from a U.S. government panel that is responsible for any national security threats when foreign companies acquire American companies. In other words, it will clearly set off a heated debate in Washington about losing control of key resources.
I’m not going to play the political game here, but the fact is that the Chinese acquisitions are really no different from when the Japanese began its heavy investment in the U.S. decades ago. Simply put, the deals add wealth to Americans and that should be the bottomline.
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George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.
