Lobbying groups are urging President George Bush's administration to block the bid by China National Offshore Oil Corporation (CNOOC) for Unocal on national security grounds.

But the US government risks a diplomatic row with China should it intervene in what Beijing insists is a run-of-the-mill transaction that should be decided by Unocal's shareholders alone.

The scale of CNOOC's task was underlined late on Thursday when the House of Representatives voted 398-15 for a non-binding resolution that calls for the US government to block the Unocal bid.

"If we allow this takeover, we're supplying China with the technological expertise it needs to become a major player in international energy," said Peter Morici, professor of business at the University of Maryland.

"Coupled with their military buildup and authoritarian systems, China becomes a threat. There's enough to block it on national security grounds," he said.

Outbidding

CNOOC, on 23 June, had kicked up a political stink in Washington by trumping an already agreed offer for Unocal tabled by US oil major Chevron.

Its bid of $18.5 billion is $1.5 billion more than the Chevron offer, so, on straight financial terms, it is good enough to warrant a vote by Unocal shareholders that is scheduled for 10 August.

But in political terms, US legislators are aghast at the prospect of a Chinese-owned entity grabbing a slice of the sensitive US energy industry.

House Democratic Leader Nancy Pelosi said that if the CNOOC bid succeeded, China would gain access to "cavitation" technology to dig far deeper underground than it can now.

"That same technology can be used by the Chinese to do nuclear tests underground and to mask them, so we would not ever be able to detect them," she said.

Barring a transaction

The battle has been joined in by the US Treasury's Committee on Foreign Investments (CFI), which since 1988 has barred only one transaction out of the 1500-odd it has examined.

That was a year after the 1989 Tiananmen Square massacre when a Chinese company was blocked from taking over a US firm.

In this case, however, the committee will only step in if Unocal accepts the CNOOC bid, which so far the California company's board has resisted in preference to Chevron's cheaper offer.

Some analysts welcome Chinese
global investments in oil

Should it decide to intervene, the committee would have 45 days to conduct its investigation and submit a recommendation to the president, who would have 15 days to act.

Bush would face a dilemma. He could placate Congress and US industry by blocking CNOOC, in the process teaching Beijing a lesson that its policies and runaway export growth will no longer be tolerated.

Or he could stay on-side with one of the most important trading partners of the United States, a country where cheap goods and Treasury bond purchases have kept inflation down and growth up.

Broader agenda

US critics suspect that Unocal will prove the thin end of the wedge as China seeks to extend its commercial might into a host of sectors in the United States and elsewhere.

"People are not just worried about the yuan but about China's broader geopolitical agenda. This takeover of Unocal brings everything to the fore," Morici said.

Others, however, see China as a scapegoat for much of the structural problems ailing the US economy, including the long-term decline of industry and chronic balance-of-payments problems.

They argue that for CNOOC's bid to be derailed by political interference would be the height of hypocrisy from a country that preaches free trade.

"It would be completely uncalled for. There are no real national security implications," said Daniel Griswold of the Cato Institute's Center for Trade Policy Studies.

"UNOCAL's energy assets are a couple of drops in the bucket of global energy. It would send a terrible signal at a time when we should be welcoming foreign investment in the US energy sector," he said.