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CNOOC's Bid May Ease RMB's Pressure

If China National Offshore Oil Corporation (CNOOC) 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, analysts said in Beijing Thursday.  

CNOOC, China's largest offshore oil and gas producer, announced last week that it had proposed a merger with Unocal, offering US$67 in cash per Unocal share.


The US$18.5-billion offer represents a premium for Unocal's shareholders of about US$1.5 billion 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 US$16 billion of loans from Chinese and foreign financial institutions.


Some US$13 billion of loans will be provided by the Industrial and Commercial Bank of China (ICBC) and its parent company China Offshore Oil group, with only US$3 billion 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 US$13 billion 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 US$206.7 billion in 2004 to US$609.9 billion 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 Unocal was hailed because it would result in capital outflows of US$13 billion 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.


(Xinhua News Agency July 2, 2005)

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