VZCZCXRO5718
RR RUEHCN RUEHVC
DE RUEHGH #0399/01 2621022
ZNR UUUUU ZZH
R 181022Z SEP 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7162
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 7748

UNCLAS SECTION 01 OF 02 SHANGHAI 000399 
 
SENSITIVE 
SIPDIS 
 
FRANCISCO FRB FOR CURRAN/GLICK; NEW YORK FRB FOR 
CLARK/CRYSTAL/DAWSON 
STATE PASS CFTC FOR OIA/GORLICK 
CEA FOR BLOCK 
USDOC FOR ITA/MAC DAS KASOFF, MELCHER AND OCEA/MCQUEEN 
TREASURY FOR AMB.HOLMER, WRIGHT AND TSMITH 
TREASURY FOR OASIA - DOHNER/HAARSAGER/CUSHMAN 
TREASURY FOR IMFP - SOBEL/MOGHTADER 
NSC FOR LOI 
USTR FOR STRATFORD, WINTER 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV PGOV PREL CH
SUBJECT: CHINESE AUTHORITIES NERVOUS OVER AIG FINANCIAL CRISIS 
 
REF: SHANGHAI 363 
 
SHANGHAI 00000399  001.2 OF 002 
 
 
¶1.  (SBU) Summary: According to an American International Group 
(AIG) General Insurance Company China high level official in 
Shanghai, Chinese regulatory authorities are concerned about 
AIG's stability in China.  The State Council ordered the China 
Insurance Regulatory Commission (CIRC) to request an accounting 
from AIG China and American International Assurance (AIA) China 
on the ability of the two companies to insure Chinese policies. 
Despite concerns, the official emphasized that AIG and AIA are 
solvent in China.  There have been numerous inquiries from the 
public, but thus far no demand for policy cancellations. 
However, AIG China has experienced numerous cancellations and 
suspension of contracts with other companies because of AIG's 
drop in credit rating in the United States.  AIG China also 
fears that the turmoil at its U.S. parent company will give a 
pretext for CIRC to deny pending applications for additional 
branch offices.  End Summary. 
 
¶2.  (SBU) According to the AIG official in Shanghai, CEOs of AIG 
China and AIA China were called to Beijing on Wednesday, 
September 17 to report on the companies' financial status.  The 
official said both companies received summons on September 16 
from the China Insurance Regulatory Commission (CIRC) at the 
behest of the State Council and were surprised by the speed and 
depth of the request made by Beijing.  In the summons 
notification, CIRC detailed very specific questions about AIG 
and AIA operations and risks to policy holders in China and 
wanted assurance that all policies written in China would be 
honored. 
 
¶3.  (SBU) The official said that although AIG China is 
financially solvent, there was very little the CEO could report 
to CIRC about the status of the parent company until Wednesday 
morning after the announcement of the USG 85 billion bailout 
announced on Tuesday in the United States.   Although the AIG 
parent company faced liquidity problems, the official emphasized 
that AIG China and AIA China do not have the same liquidity 
issues.  AIG China is "completely insulated from what is going 
on in the United States, and the financial problem is solely at 
the corporate financial level."  Although Chinese regulations 
set a minimum capital requirement of RMB 200 million for wholly 
foreign owned insurers, AIG China currently has RMB 600 million 
set aside for the capital requirement.  The official assured 
that this is more than enough for AIG China to remain solvent. 
The problem is the "perception" that the parent company is 
failing. 
 
Heavy Fallout Already Being Felt 
-------------------------------- 
 
¶4.  (SBU) The official noted that, unlike Singapore and Hong 
Kong, policy holders in Shanghai or elsewhere in China have not 
requested a cancellation of their policies.  The lack of public 
reaction is because "mainland Chinese do not yet have the 
sophistication and experience with insurance."   However, the 
official said there were many inquiries from the public and did 
not rule out the possibility of some policy holders cancelling 
policies as news of the reaction in Hong Kong and Singapore 
spread.  The immediate implications are that partner businesses 
have called to suspend or cancel contracts and other cooperation 
as AIG's credit rating plummeted.  The official explained that 
many of these contracts are specifically contingent on the 
company's credit rating, and AIG, along with AIA, will face some 
tough questioning from partner businesses over the next few 
days. 
 
Implications for AIG China's Expansion 
-------------------------------------- 
 
¶5.  (SBU) According to the official, the Central Government is 
likely to nix the pending applications for two additional AIG 
branches in Zhejiang and Jiangsu provinces.  CIRC has been 
"reluctant" to provide national treatment to foreign insurance 
providers, and is "itching" for an excuse to deny requests for 
greater access.  As a direct result of the May 2007 Strategic 
Economic Dialogue, AIG received permission to establish a wholly 
foreign owned enterprise (WFOE) in July 2007.  Subsequently, the 
WFOE applied for 3 branches, one of which was approved to open 
in Beijing.  CIRC told AIG it would wait to see how the Beijing 
 
SHANGHAI 00000399  002.2 OF 002 
 
 
office fared before approving the other two applications.  The 
official now believes AIG's financial crisis will provide the 
justification for CIRC to deny AIG China's license applications 
based on the "stability" of the AIG parent company.  In 
addition, the official complained that CIRC does not take the 
same approach to domestic insurance companies that can 
concurrently open multiple branches with relative ease.  There 
is also fear that CIRC will increase scrutiny over AIG and other 
foreign insurer operations, to the benefit of domestic insurers. 
 
 
AIG - An American Company with Shanghai Roots 
--------------------------------------------- 
 
¶6.  (U) AIG, founded in Shanghai in 1919, is now China's largest 
foreign general insurance company.  During World War II, the 
company moved its headquarters to New York and was the first 
foreign company to resume operations in Shanghai after the war 
ended.  The Shanghai office was closed again in 1950 due to 
political instability.  In 1992, AIG was the first foreign-owned 
life and non-life insurance business to receive permission to 
once again operate in China and opened a branch AIA office (AIA 
is an AIG subsidiary company).  Currently AIA has 8 branches in 
China and AIG has three (Shanghai, Guangdong and Szenzhen) 
Since reentering the market, AIG, together with AIA, have been 
able to gain 40 percent of the market share for all foreign 
non-life insurance services.  However, the official noted that 
this represents about 1 percent of the total insurance market in 
China (reftel).  AIG also maintains a joint venture in China, 
AIG-Huaitai Fund Management Company. 
CAMP