VZCZCXRO3447
PP RUEHCN RUEHGH
DE RUEHGH #0418/01 2690957
ZNR UUUUU ZZH
P 250957Z SEP 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC PRIORITY 7197
INFO RUEHBJ/AMEMBASSY BEIJING PRIORITY 2151
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGZ/AMCONSUL GUANGZHOU PRIORITY 1405
RUEHHK/AMCONSUL HONG KONG PRIORITY 1589
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHSH/AMCONSUL SHENYANG 1428
RUEHCN/AMCONSUL CHENGDU 1434
RHEHAAA/NSC WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 7784

UNCLAS SECTION 01 OF 02 SHANGHAI 000418 
 
SENSITIVE 
SIPDIS 
 
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SF FRB 
FOR CURRAN/GLICK/LUNG; NY FRB FOR CLARK/CRYSTAL/DAWSON 
TREASURY FOR OASIA-DOHNER, HAARSAGER, CUSHMAN, WINSHIP 
USDOC FOR ITA DAS KASOFF, MELCHER, OCEA 
NSC FOR LOI 
 
E.O. 12958: N/A 
TAGS: EFIN PGOV PREL ECON CH
SUBJECT: AIG FACING FURTHER REGULATORY PRESSURE 
 
SHANGHAI 00000418  001.2 OF 002 
 
 
¶1. (SBU) Summary: A top AIG official in China on September 25 
described disruptive new reporting requirements from the China 
Insurance Regulatory Commission (CIRC). These are having a 
significant impact on AIG's operations in China, and AIG is 
working with regulators to institute more workable compromise 
measures. End summary. 
 
CIRC's New Reporting Requirements 
 
¶2. (SBU) A top AIG official based in Shanghai told Congen 
Econoff that as of Monday, September 22, AIG was complying with 
a new CIRC demand that AIG provide the regulator with daily 
updates of its financial accounts, and also to get pre-approval 
from CIRC for all movement of capital out of China. The AIG 
official said that CIRC's intention apparently is two-fold: (1) 
To assure that no AIG capital is improperly sent to the parent 
company, and (2) to assure that AIG capitalization is adequate 
to pay claims in China. CIRC presented the new procedure to AIG 
on Friday, September 19, and AIG consulted with its legal 
department before complying on Monday, September 22. 
 
¶3. (SBU) The AIG official said that CIRC most likely is reacting 
to New York State's recent regulatory changes allowing the 
parent company to access the capital of subsidiaries in the New 
York area, which was intended to help resolve AIG's liquidity 
problems. (Note: According to U.S. financial press, New York 
Governor David Patterson announced on September 15 that AIG 
would be allowed to use $20 billion of its subsidiaries' 
holdings as collateral to borrow cash. End note.) The 
Shanghai-based AIG official said that recent concerns in the 
United Kingdom over a Lehman funds transfer from a U.K. 
subsidiary to the parent company may also have played a role. 
 
Significant Impact on AIG's Business 
 
¶4. (SBU) These new requirements are having a significant impact 
on AIG's daily operations in China, said the AIG official. 
Normally, AIG's China operations make multiple movements of 
funds to the United States, including for payment of claims by 
U.S.-based policyholders and for payments to U.S.-based 
reinsurers. Under the new requirements, AIG must provide CIRC 
with details of planned capital transfers every day at around 4 
o'clock, and then wait for CIRC's approval before proceeding. In 
itself, this is a burden to AIG's operations. In addition, CIRC 
has stopped two transactions from proceeding, and there is no 
indication of when these transactions will be approved. 
 
¶5. (SBU) AIG is working with Yuan Li, CIRC Assistant Chairman, 
and with the local Shanghai insurance regulator to reach a more 
workable compromise, said the AIG official, but there is no 
indication that CIRC will accept one. Specifically, AIG would 
prefer to set a limit under which AIG would be allowed to 
transfer funds overseas without preapproval from CIRC, say 
around RMB 1 million. These would still be included in the daily 
financial report, in the AIG offer, while transfers over that 
amount would still be subject to prior approval. 
 
Are AIG's China Operations For Sale? 
 
¶5. (SBU) The AIG official further noted that at a recent 
internal meeting between CIRC and Chinese insurance companies, 
CIRC had inquired about the impact of AIG's financial issues on 
the domestic firms. In addition, CIRC had raised the subject of 
whether a domestic insurer would be interested in or willing to 
purchase AIG's assets in China. According to the AIG official, 
one company indicated it was in a position to make the deal. The 
AIG official noted, though, that AIG almost certainly would not 
be interested in selling its China business, especially 
considering the firm's historical ties with China.  (Note:  AIG 
was actually founded in Shanghai.  End note.) 
 
Comment 
 
¶6. (SBU) CIRC's new daily regulatory oversight over a foreign 
insurer provides a window on the regulatory measures that China 
may be considering in other business sectors as the financial 
crisis continues. The AIG official suggested that this Chinese 
measure was modeled after a similar one imposed on AIG 
 
SHANGHAI 00000418  002.2 OF 002 
 
 
operations in Hong Kong, which also strikes us as a likely 
pattern for potential future Chinese regulatory steps.CAMP