Skip to main content

With politicians on both sides of the Pacific rattling sabers over


(CEO) - Get CNOOC Ltd. Report

bid for


( UCL), what are China fund managers doing?

Two weeks ago, the House of Representatives passed a nonbinding resolution calling on the president to review the $18.5 billion bid on the grounds that it could threaten U.S. national security. Why the alarm over a relatively simple corporate acquisition? Ostensibly because CNOOC's largest shareholder is the Chinese government.

In response to Congress' jawboning, the Chinese foreign ministry demanded Congress correct its "mistaken ways of politicizing economic and trade issues."

The battle lines may be clearly drawn, but Adrian Au, portfolio manager for the


Dreyfus Premier Greater China Fund, advises that traders ignore the hot air and "use any weakness to once again enjoy the long-term growth in China."

Any pullback in Chinese stocks nowadays would be welcome for investors looking for a decent entry point. After moving sideways for the better part of the past year, Chinese stocks, as measured by the

iShares FTSE/Xinhua 25 China


(FXI) - Get iShares China Large-Cap ETF Report

, have jumped 5.5% since the start of June.

Scroll to Continue

TheStreet Recommends

Of course, the CNOOC bid threatens to upend a $16.5 billion pact between Unocal and


(CVX) - Get Chevron Corporation Report

. Au says it is clear that China needs to build up more energy resources because its strategic oil reserve is low, at 10 days vs. 90 days for developed countries. He calls Unocal and its sizable reserves a "rare opportunity for which China is willing to pay a hefty premium."

"In the end, Unocal may be divided between Chevron and CNOOC because of the political pressure, but this may not be in the best interest of Unocal's shareholders," says Au.

Mark Headley, portfolio manager for the $386 million

(MCHFX) - Get Matthews China Investor Report

Matthews China fund, believes the decision over Unocal's future should ultimately be made by the shareholders of the company.

"There are certainly risks in going with a state-dominated Chinese company that a large U.S. company does not represent, so it is not as simple as price," says Headley. "But in the long run, price is usually the most important issue."

Headley adds that whether Unocal goes to a Chinese buyer, he "would not want to be the next Chevron executive to ask a favor from the Chinese government."

On the broader question of Chinese/U.S. trade relations, Headley paints the problem as a classic international dispute that allows politicians to make a lot of noise while yielding little in terms of real-world consequences. He points out that a trade war with China could hurt the earnings of many key U.S. companies, such as


(WMT) - Get Walmart Inc. Report



(DELL) - Get Dell Technologies Inc Class C Report

. It would also push inflation up significantly and possibly lead to the mass selling of dollars by the Chinese.

"Criticism of China makes perfect sense when it comes to demanding protection of our intellectual property rights and long-term access to the Chinese market for our goods and services," says Headley. "This fight, however, makes no sense. But I guess no one really expects the House of Reps to make much sense."

Pamela Chan, portfolio manager for the $119 million

(EVCGX) - Get Eaton Vance Greater China Gr A Report

Eaton Vance Greater China Growth Fund, says that if the CNOOC/Unocal deal is not blocked by the U.S. Congress, there should be no long-term ramifications on U.S.-China relations. But if Congress were to block the deal, lawmakers would have to find a solid reason for doing so -- "otherwise U.S.-China relations would continue to deteriorate."

One method with which the Chinese may attempt to mollify rowdy U.S. pols is by loosening the yuan's peg to the dollar, either later this year or in 2006. Nevertheless, Headley dismisses the calls for floating the currency as "absurd," as China lacks the banking system to even consider such a move.

"After the lessons of the 1997 Asian financial crisis, which was largely driven by immature economies allowing currencies to freely trade, I believe any change will be minimal," says Headley, who offers a slow, managed appreciation as a potential solution.

As for Chinese shares, Headley expects more sideways movement. He says domestic demand in China seems to be holding up, but the quality of China's economic growth remains a key question.

"The government is certainly trying to improve that quality," says Headley.

If that quality upgrade entails buying more American companies, however, then we will certainly be in for a lot more shouting on Capitol Hill.

To view Gregg Greenberg's video take on the reaction of China fund managers to the CNOOC-Unocal deal, click here.