Hamish McRae: America welcomes inexperienced high rollers - so long as they are not oilmen from Beijing

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The Independent Online

Those are two possible conclusions to be drawn from the news last week that the Chinese oil group CNOOC had withdrawn its bid for Unocal, the California-based oil company, but that Germany's Adidas was going ahead with its bid for Reebok, the Massachusetts firm famous for its sports shoes. Either way, the US must face the fact that its current account deficit, now an unprecedented 6 per cent of GDP, will lead to foreigners buying more of its companies. As the left-hand graph shows, the US has maintained its level of investment, but has not saved enough to cover it - hence the widening deficit.

Until now, foreigners buying US Treasury securities have covered not only the current account deficit but the budget deficit, too. But such securities offer yields that are, by post Second World War standards, low. The 30-year bonds are offering 4.5 per cent, 10-year ones 4.3 per cent. Indeed, many people involved in financial markets, including the Federal Reserve, are puzzled that long-term interest rates have not risen more. Still, the feeling is that, sooner or later, the foreign holders will want to diversify their investments into US shares and property, and in some instances, into taking over American companies.

CNOOC might have succeeded in its bid had it, for example, found a US partner, which would have allayed some Congressional fears that ultimately made the bid untenable. The rational case against the bid is pretty weak. Unocal is tiny by oil company standards: its proven reserves are less than 2 billion barrels, compared with more than 10 billion barrels for Chevron, the alternative bidder. In any case, you don't need to own an oil company to secure reserves. As Jim Glassman of the American Enterprise Institute (AEI) points out, a taxi company does not have to own a car maker to get its cars.

Irrational or not, political concern has been mounting in the US about rising Chinese economic power, as the pressure for a revaluation of the yuan has shown. That the oil price is at a historic high, in money terms, has made Americans acutely aware of their vulnerability to imported oil. That it was a Chinese firm bidding for a US oil company gave the politicians the justification. Had it been a Chinese company bidding for Reebok, the opposition would have been harder to sustain.

The Reebok deal is not expected to be completed until next spring, but it seems to have no political opposition at all. People appear to be relieved that the merger will create a more effective competitor against Nike and increase competition in the sports-goods market. On the other hand, Adidas is German, not Chinese, and German investment is welcome.

You can see this different attitude towards Germany and China over the issue of whether state-controlled foreign companies should be able to buy US firms. This was one of the arguments used against the Chinese bid, for CNOOC is 71 per cent owned by Beijing. But there was no opposition to Deutsche Telekom when it took over the US mobile phone firm VoiceStream, or when the German Post Office bought DHL. National background seems to matter more than state ownership.

More rows can be expected as Chinese companies come back for more, doubtless after preparing their ground better. China has been steadily increasing its direct investment abroad (right-hand graph) - building overseas plants. Expect this to be supplemented by buying companies, too.

One intriguing question is whether they will be good investors, or will end up paying too much for assets at the top of the market. Arguably, buying an oil company right now is doing just that. Foreign investors in the US have a poor record. Another AEI fellow, Phillip Swagel, points out that foreigners plunged into property in the late 1980s boom, hi-tech companies in the late 1990s boom and may be making the same mistake buying US Treasury securities now.

The US is, to some extent, financing its deficit by selling foreigners duff investments. Mr Swagel, speaking at an open AEI seminar, offered an extraordinary fact: because the US earns a much higher return on its foreign investments than foreigners earn on their American ones, it is covering one-third of its current account deficit simply by better investment. America, like Las Vegas, needs "inexperienced high rollers". The chap from the Chinese embassy behind me smiled thinly. China fits that profile.

This leads to an even bigger matter than the US willingness to let foreign companies buy US ones. It is the extent to which international investment skills have become a competitive advantage. Manufacturing know-how crosses national boundaries with the click of a mouse. Many Chinese factories have better equipment than US or European ones. Service know-how too, for these are being outsourced to lower-wage countries, particularly India. True, some companies in the US and Europe have a mass of technical skills that would be hard to replicate, at least swiftly. And true, for the time being, educational standards at the top US and UK universities are high enough to maintain some competitive advantage there. Nevertheless, the lead is precarious and will become more so.

So we should welcome the evidence that the US seems to be good at managing its international assets. Britain, too, is good at backing winners abroad and, ahem, selling home-grown duffers to foreigners. If the US covers one-third of its current account deficit by good investment, we manage to run an, albeit smaller, deficit without serious damage to our international asset position.

It would, however, be unwise of any country to rely on buying cheap and selling dear to counter the fact that it does not save or export enough. Come what may, the US will find itself selling more of its assets to foreign owners. Not all those assets will be duff ones. Inevitably, some shift of power will result and that will lead to growing tension, particularly if the shift of power is principally to China.

What goes down in Britain goes up across the Atlantic

Lower interest rates last week in Britain, higher ones this week in the US. The Federal Reserve's Open Market Committee (the equivalent of the Bank of England's Monetary Policy Committee) meets this Tuesday, when it is widely expected to raise rates by 0.25 per cent to 3.5 per cent. Market expectations are for further rises through the autumn, bringing rates perhaps to 4.25 per cent by the end of the year.

Given the contrasting expectations for further declines in the UK, it could well be that dollar rates will soon be higher than sterling.

The parallels look almost uncanny. The US has, like the UK, enjoyed rapid growth but, as noted above, has an even more serious current account deficit. It has also had a housing boom, which the Fed feels should now be deflated. As in the UK, the US is probably not heading for a significant fall in house prices but a plateau. But it does not need a fall to trim consumer growth. The fact that prices cease to rise would be enough to worry people who have borrowed against the rising equity in their homes to finance their spending.

There is a further parallel in that the method of home finance in both countries is converging. US mortgages used largely to be at rates that were fixed for long periods, whereas now the fixed periods have become shorter. UK mortgages, on the other hand, are now generally fixed for a couple of years at least.

The effect of these changes is that in the UK it takes longer for interest-rate changes to feed through into final demand: in our case up to a year. In the US, however, the economy may be more responsive to rate changes than it was, say, 10 years ago. Here, the squeeze is still in the early stages and has been offset in large measure by falling long-term bond yields. But if the UK pattern holds, expect the American consumers to rein back smartly some time next summer. They have, of course, been the main source of demand in the world economy. So if this line of argument is right, expect global growth to be a lot slower in 2006 than it was in 2005.

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