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CNOOC's Unocal bid may ease yuan pressure
If China National Offshore Oil Corporation (CNOOC) Ltd. successfully merges with the US oil company Unocal, the astronomical sum of loans in US dollars used by CNOOC will alleviate the pressure on Chinese yuan's appreciation, observers said in Beijing Thursday. CNOOC, China's largest offshore oil and gas producer, announcedlast week that it had proposed a merger with Unocal, offering 67 US dollars in cash per Unocal share. The 18.5-billion-US dollar offer represents a premium for Unocal's shareholders of about 1.5 billion US dollars over the value of Chevron Corporation's offer, based on its closing price on the New York Stock Exchange (NYSE) at the time. If CNOOC succeeds, the case will become the largest overseas merging transaction of Chinese enterprises in history. According to the Beijing-based China Business Times, CNOOC plans to borrow a total of 16 billion US dollars of loans from Chinese and foreign financial institutions. Some 13 billion US dollars of loans will be provided by the Industrial and Commercial Bank of China and its parent company China Offshore Oil group, with only 3 billion US dollars of international commercial loans. As China regulates its capital accounts, any overseas merging deals of Chinese enterprises will be warranted by the State Administration of Foreign Exchange (SAFE), so CNOOC, a typical state-owned enterprise, must have received support from the SAFE for the merger proposal, the paper said. CNOOC's borrowing of huge amounts of fund in US dollars from the Chinese side will result in the abatement of 13 billion US dollars in China's official foreign exchange reserve, analysts say. In some sense this means the alleviation of current pressure demanding for the Chinese yuan's appreciation, according to the newspaper. China's forex reserve surged by as much as 206.7 billion US dollars in 2004 to 609.9 billion dollars by the year-end, second only to Japan, according to SAFE figures. The country's fast forex reserve increase has become an excuse of some countries to demand the appreciation of the Chinese currency. The Chinese government, however, insisted in keeping the renminbi (RMB) exchange rate basically stable at a reasonable and balanced level. The rocketing of China's foreign exchange reserve was attributed to the increasing surplus in trade and capital flow. Some speculative funds betting on the yuan's appreciation, or the so-called "hot money," have sneaked into China under capital accounts or based on no real trade since last year, according to sources with SAFE. CNOOC's planned merger with Unocol was hailed because it would result in capital outflows of 13 billion US dollars if it succeeds,which will help reduced China's foreign exchange surplus. The foreign exchange loans in enormous sums will also help reduce the risks
for Chinese financial organizations, because if China really appreciates its
currency, the outflow of US-dollar capital will reduce the losses of the Chinese
side for holding US-dollar assets, experts say.
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