Markets Work in Asia, Too

One of the main complaints I have gotten from readers of my China pieces (on the CNOOC/Unocal/Chevron menage a trois) is something akin to the following: CNOOC is a state-owned company, and therefore does not respond to the market, and the Chinese are communists, and just different because they are Chinese. CNOOC will simply go to the Chinese government’s big bag o’ cash, grab a handful, and outbid poor Chevron.

That’s why, they say, Congress needs to intervene, and prevent the sale from taking place.

It is true that CNOOC Ltd., the publicly traded subsidiary of state-owned China National Offshore Oil Corp. and the entity making the bid, is securing much of its financing from the state-owned parent. And the Financial Times reported Thursday that CNOOC Ltd. is preparing to up its current $67/share bid to $70 or even $72.

However, a Hong Kong newspaper, the South China Morning Post, is also reporting that CNOOC is preparing to abondon the entire effort, angry at “dirty politics” in Washington.

But what can you say about this statement from a CNOOC official in Xinhua, the Chinese government’s very own news agency, that the company “considering the interests of CNOOC’s shareholders, we will not easily change the bid.”

Shareholders? Owners? Really?

Neither culture, nor ideology, nor national security, nor sheer willpower can make the reality of a market — the reality of economics — go away. The market in Asia has not been kind to CNOOC and its bid. The company is relatively debt-free now. It would not be when the deal is done. Investors — yes, investors — are concerned about that.

Domestically, China has set price caps on the retail price of gasoline and crude products. In order to keep the good “affordable.” This means that demand is high, and investment in new production is low. The result of this is the same as it would be anywhere else this kind of nonsense is or has been tried — shortages and a reluctance to invest in increased production without subsidies.

This makes investing in China’s downstream an iffy proposition. If you cannot recover your costs and pay investors, you’re unlikely to want to invest at all. The Chinese will eventually figure this out, maybe even before gaslines start forming and motorists start rioting.

It does not matter if we are talking communists, Roman imperialists, American social democrats, Peronists, Chinese, Scandinavians, Arab bedouins, whatever — the result is always the same. The market will be heard, no matter how hard someone in charge wants to control the price, reward friends with monopolies, reorder the world, or whatever. Some communities and some societies may make different choices as to what is important — wages versus family time, or whatever — but so long as individuals are free to choose and accept the consequences (and bear the burden) for whatever choices they make, there’s nothing wrong with that.

But you can never, ever, ever NOT have a market.

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2:20 pm on July 29, 2005