CHINESE AUTHORITIES NERVOUS OVER AIG FINANCIAL CRISIS

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