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  • Open Your Wallets. Why? China is Spreading the Wealth 0 comments
    Feb 24, 2011 10:00 AM | about stocks: CEO, CHK, PTR
    Remember America's hysteria over the rise of Japan back in the 1980's. First there was widespread concern over Japan's perceived superiority in manufacturing. Would Japan eclipse the United States? Then, as Japan began buying up huge assets like Rockefeller Center and major entertainment companies, many feared that Japan, Inc. would take over the United States.

    Now China is going through the same cycle. First there was deep concern over China's manufacturing boom. Soon we'll be hearing much more about China buying up significant stakes in key American firms.

    By now, every investor knows about the recent deal between Chesapeake Energy and a major Chinese oil and gas firm, CNOOC. (The full name of the firm is China National Offshore Oil Company, usually abbreviated to CNOOC and pronounced see-nook.)

    CNOOC has agreed to buy a one-third stake in Chesapeake Energy's shale oil and gas leases in Colorado and Wyoming for $570 million, in order to expand its energy assets in the United States. CNOOC also agreed to fund 66.7 percent of Chesapeake's share of drilling and completion costs until an additional $697 million is paid.

    That totals a $1.25 billion Chinese stake in a U.S. energy company. Some analysts did the math and calculated that the Chinese paid twice the market value for their stake in Chesapeake.

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    CNOOC made its first successful acquisition in the U.S. in November of last year when it bought a stake in Chesapeake's Eagle Ford shale project in Texas for $1.08 billion.

    How things have changed since 2005, when CNOOC tried to take over the Unocal oil company for as much as $18 billion. Then the Chinese company was forced to withdraw its bid after a wave of hysteria about foreign takeovers swept through Washington.

    The latest Chesapeake deal shows that China has adapted to American fears by buying smaller portions of companies. Example: a less publicized deal with CNOOC last year.

    Last October, Chesapeake announced that it had reached a deal with CNOOC to sell about a third of its interest in the Eagle Ford Shale project in South Texas for $1.08 billion.

    At today's market price, Chesapeake (NYSE:CHK) is worth $19.3 billion. CNOOC (NYSE:CEO) is valued at almost $100 billion.

    Cooperation with China is a spreading global phenomenon, especially in the oil and gas world. ConocoPhillips (NYSE:COP) is in talks with PetroChina (NYSE:PTR) over the development of a 3,000 square kilometer shale gas block near Chengdu in the Sichuan region.

    Houston-based Newfield Exploration has agreed to jointly study with PetroChina (PTR) shale gas resources at the Weiyuan field, also in Sichuan.

    China is intensely interested in learning all it can from the world's major oil firms about extracting natural gas from shale. Clean-burning natural gas has huge potential on the Chinese mainland where energy demand continues to rise, while Beijing orders the closure of polluting energy sources in an effort to meet its own clean energy targets.

    Bank On It

    Just last week, Industrial & Commercial Bank of China (ICBC) the world's biggest lender by market value, agreed to buy a stake in Bank of East Asia's (BEA) U.S. operations.

    With 80 percent control of BEA operations in the U.S., the Chinese banking giant will have access to prime business centers on the east and west coasts of the United States.

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    The deal marks the first purchase of a majority stake in a U.S. depository institution by a Chinese bank. BEA is sufficiently low profile to avoid raising a stir in the U.S. and the deal has advantages for both sides. It gives financial companies in both countries much greater access to each others' markets.

    In another recent banking move, China Development Bank is among the four final bidders to buy a large stake in the German lender WestLB. That deal that could be valued around $13 billion.

    In the auto industry, last year's $1.8 billion purchase of Ford's Volvo unit by Geely was a notable win for both sides of the transaction.

    Who Benefits?

    Chinese corporate acquisitions are continuing around the globe, most often in resource-producing companies. Deals in Canada, Australia and the African continent are so common that they barely make news. But China's return foray into the United States signals a potential sea change.

    The purchase of BEA's American banking operations was timed to coincide with a state visit by Chinese President Hu Jintao to the U.S. Although the deal doesn't have formal regulator approval yet, it seems certain that it has received the nod at the highest levels.

    ICBC's chairman explained, "Our acquisition of an 80 percent interest in BEA (U.S.A.) will enable us to establish a solid presence in the U.S. With this commercial bank license in the U.S., ICBC can further expand its retail banking business and operating network across the nation."

    Given the performance of major American banks during the financial crisis, having major a Chinese bank like ICBC operating here seems to be a positive development. Prudent lending may improve commerce and cooperation in the world's most important business relationship, that between the U.S. and China.

    Chinese funding will also help Chesapeake Energy develop its properties. The CEO of Chesapeake is enthusiastic about the partnership, saying the latest deal will "provide the capital necessary to accelerate drilling, and create thousands of jobs".

    On the day the deal between CNOOC and Chesapeake was announced, stock in the American company jumped seven percent.

    Similar deals have the potential to produce win-win outcomes for both China and the U.S. It is inevitable that Chinese capital will be an increasingly important financial force worldwide in decades to come. We would be wise to profit from its benefits rather than engage in a round of hysteria like the one that greeted Japan's arrival as a financial giant on our shores. We have much to gain, and little to lose at this point by doing business with China.

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    This "Sage of Shanghai" Humiliates Other China Stock Analysts…

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    For more information and archived issues, visit http://www.globalprofitsalert.com

    Global Profits Alert (GPA) is published by Trippon Financial Research, Inc. a financial media organization with offices in the United States, Hong Kong and Mainland China. GPA is written by Jim Trippon in conjunction with George Wolff, Sunny Wang, Todd Shriber, Kelley Damiani and J. Daryl Thompson.

    Would you like to republish this article? Global Profits Alert issues can be republished, as long as the republished issues contain the name of the author(s) and the following short paragraph:

    This information was brought to you by GlobalProfitsAlert.com, a publication of Trippon Financial Research, Inc. GlobalProfitsAlert.com publishes information on Investing in the China stock market and emerging markets, dividend stock and income investing, exchange traded funds (ETFs), green energy stocks, technology stocks, global market trends and other investment information. To view archives or subscribe, visit http://www.globalprofitsalert.com.

    Stocks: CEO, CHK, PTR
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