AIG founded in China
The collapse of US insurance giant AIG and its US$85 billion takeover by the US government on Tuesday takes the US financial crisis right to the heart of China's development as a capitalist country.
Sep 18, 2008
China's imploding US ally
By Richard Komaiko and Chris Stewart
AIG, the world's sixth-largest company by assets and biggest insurer, according to the Forbes Global 2000 list for 2007, is one of the few US institutions to be founded in China, its roots dating from 1919 when Cornelius Vander Starr, a veteran of World War I, founded a small insurance company in Shanghai called American Asiatic Underwriters, later to become AIG.
More famously, Starr's successor, Maurice R Greenberg, built relations with China's leadership from 1975, his first visit to the country predating by several years the revolutionary moves by Deng Xiaoping to open up China to Western influences.
In this, Greenberg proved himself a master of developing guanxi, a term summarized as "connections" and now recognized as holding the key to successful development of business in China.
According to Benjamin A Shobert, reviewing Robert Buderi and Gregory T Huang's book of that name, "guanxi is commonly perceived as partnering and understood to focus the attention of Westerners on the great importance that the Chinese put on relationships. To most Westerners guanxi emphasizes personal relationships in contrast to the contractual, non-relational business practices common in America.
"While a portion of the word's meaning can simply be seen as stressing relationships, the authors emphasize that a better understanding of the word is to emphasize four things: trust, favor, dependence and adaptation - the last what the authors call 'patience and cultivation'."
Greenberg's patience and cultivation of relations with China's leaders saw him play a key role in building links between the US and China, while his company had a front-runner's view as it and China metamorphosed into leading players in the global business world.
Starr was the initial pathbreaker. When he set up shop in Shanghai, there were many other Westerners selling insurance in the city, then as now the country's financial hub. But these potential rivals almost exclusively concentrated their efforts on selling to other Westerners. Starr realized that the Chinese people themselves represented a vast and underserved market for insurance, with relatively low risks. This insight would enable him to become one of the wealthiest men in the world.
Within 10 years, Starr had established offices across China, Hong Kong, the Philippines, Indochina, Jakarta and Kuala Lumpur. In 1926, he opened his first office in the United States. The growth of his company was temporarily disrupted by the Chinese civil war and the general turmoil in East Asia. In 1939, Starr moved the headquarters of his corporate empire to the Empire State - New York. From there, his company and fortune grew many fold.
In 1962, Starr appointed Greenberg to head AIG's then failing North American operations. In a remarkable display of business prowess, Greenberg turned the unit around, a feat that encouraged Starr to name him his successor before passing away in 1968.
Starr bequeathed all his wealth to the C V Starr Foundation, one of the largest foundations in the United States, with over $3 billion in assets. Greenberg became the chairman of this foundation while also assuming the reins at AIG. Under his leadership, the company prospered while he himself became one of the kingpins of American foreign policy.
In 1977, he became a member of the Council of Foreign Relations, arguably America's most influential think-tank, and over the next three decades he would hold numerous leadership positions in the council, culminating in 1997 with the founding of the Greenberg Chair.
Today, the Greenberg Chair "is the senior person directly responsible for the substantive content and management" of the think-tank. Greenberg has also been a member of the board of directors of the New York Stock Exchange; a former chairman, deputy chairman and director of the Federal Reserve Bank of New York; a member of the US-China Business Council; the chairman of the Asia Society; and a member of the Advisory Committee for Trade Policy and Negotiations to the President of the United States.
With all of these roles, plus his control over the resources of the Starr Foundation and the American International Group, Greenberg's power to shape America's foreign policy was rivaled only by Citizen Kane.
Greenberg's foreign policy views were heavily influenced by two factors. One was his experience in World War II of the liberation of the Nazi concentration camp at Dachau. The other was the legacy of Starr's love for China. This latter factor would ultimately play an enormous role in shaping America's policy toward China for more than a quarter of a century.
In all of his actions and with all of his influence, Greenberg exercised a sanguine desire to foster reconciliation and cooperation between the United States and the People's Republic of China. The impact of this desire can be seen in the fingerprint that Greenberg has left on academic and policy institutions around the United States.
At his discretion, the Starr Foundation has funded numerous fellowships with the Asian Cultural Council, donated $300,000 to Columbia University's East Asian Library and considerably more to Berkeley's C V Starr East Asian Library. Most recently, Greenberg and the Starr Foundation each donated $25 million to Yale University to create the Maurice R Greenberg Yale-China Initiative.
Greenberg's lobbying efforts were a driving factor behind America's decision to support China's admission to the World Trade Organization, which it officially joined in November 2001. Undoubtedly, a fair amount of the credit for the creation of an American policy environment that is favorable to China is due to Greenberg and the resources that were generated by AIG.
AIG's own development in China took various, often ground-breaking, forms. China America Insurance Company was formed in 1980 as a 50-50 joint venture between AIG companies and the People's Insurance Company of China (PICC), the first joint venture between a foreign insurance organization and PICC. Personal ties with future leaders were also forged. In 1990, AIG financed and chaired a financial services conference in Shanghai to assist then city mayor and later country premier Zhu Rongji in introducing the international financial community to investment opportunities in Shanghai.
Two years later, AIG unit American International Insurance (AIA) established a branch office in Shanghai, to become the first foreign-owned life and non-life insurance business to receive a license from the People's Bank of China. In 1995, AIG companies won licenses to extend operations to Guangzhou, the key city in the country's efforts to open up to the outside world of commerce, and a year later it secured a lease allowing it to return in 1998 to the Shanghai Bund, home of C V Starr's original Shanghai insurance companies.
In 2003, by which time AIG's presence in the country extended to several provinces, the insurer acquired a 9.9% stake in PICC Property and Casualty (PICC P&C) when the Chinese company listed in Hong Kong. In 2005, as the Chinese government continued to ease its grip on the financial sector, AIG Private Bank became the first foreign private bank to receive approval to open a representative office in Shanghai.
One immediate effect of AIG's collapse could be on PICC P&C's stock price, which would be at risk if AIG liquidated its stake, Citigroup analyst Bob Leung said in a research note on Tuesday.
Chinese insurers also face a greater counter-party risk from the collapse of AIG than from Lehman Brothers, the other US financial giant that crumpled in the past few days. Lehman, which has filed for bankruptcy has significant exposure in Asia. "Given the very low life insurance accession rate in Asia, "if AIG loses its A- rating or its situation worsens significantly, we expect the financial impact to affect mainly P&C insurers," Leung wrote.
S&P lowered AIG's long-term counterparty rating to 'A-' on Monday.
China's insurance regulator declared that AIG businesses in the country were sound, echoing statements from the rest of the region. This is however a big concern going forward, given the large market share that AIG commands in many Asian markets, and the sheer volume of domestic securities that it holds across the region.
Other insurers in China meanwhile may gain from AIG's loss. "China Life, with a strong balance sheet and limited non-yuan asset exposure (less than US$3 billion and mainly in H-stock [Hong Kong listed shares] and cash) has the strongest balance sheet of all regional insurers and is likely to benefit from a 'flight to quality' perspective," Leung wrote.
The sudden decline of AIG may lead to a reduced influence of the company in international affairs, and a cut in the amount of resources that are lavished on America's foreign policy establishment for the purpose of encouraging China-friendly policy.
As it is, Greenberg's pathfinding and influential role in China has already been superceded to a large extent by the huge influx of other Western business leaders, notable among them Henry Paulson, who as chairman and chief executive of Goldman Sachs spent much time and and effort building his own relations with the present Chinese leadership.
Paulson's appointment as US Treasury Secretary in 2006 came at a time of simmering tensions between Washington and Beijing over China's reluctance to strengthen its currency and rein in the growing trade surplus it enjoyed with the US. Demands for faster appreciation of the yen continue, but their tenor has become less strident since Paulson took up his government post, with the focus on relations changing through the Strategic Economic Dialogue to broader long-term bilateral economic interests.
Ironically, while the US Federal Reserve played the dominant role in bailing out AIG this week, it was Paulson holding key strings of power in Washington while Maurice Greenberg sat on the sidelines.
In 2005, Greenberg was accused of financial malfeasance. In the ensuing scandal, he was ousted from his leadership role at AIG. Nonetheless, he retained direct ownership of 39 million shares of AIG stock, and an additional 243 million shares through the investment company that he still controls, C V Starr and Co. At the beginning of this year, his shares were worth $15.8 billion. By the close of the market on Tuesday afternoon, they were worth a little more than $1 billion.
The links that Greenberg had cultivated over the decades with the Chinese community certainly are also looking frayed when it comes to trust in AIG products in the wake of this week's collapse.
As Chan Akya reports in Asia Times Online on Wednesday ( Waiter, there's a banker in my soup), panic-stricken policyholders lined up all day on Wednesday in Singapore to surrender their policies to secure redemption value.
In Hong Kong, where AIA is the largest life insurer with more than 26% of the market and more than 1.9 million policies sold, more than 1,700 people canceled their insurance policies with AIA on Tuesday. On Wednesday, some 170 policy holders rushed to AIA headquarters to cut their insurance or investments. The Hong Kong government has demanded AIA seek approval before it removes any asset out of the territory.
One 50-year-old woman at the hectic commercial and retailing center of Causeway Bay said she decided to surrender her insurance policy today as she was worried AIA's business might be affected.
"I was supposed to pay premiums this month but I don't want to take any risk now. I am so afraid that I will lose all my money here. To keep as much money as I have in my pocket, I surrender the policy now," she said.
With further reporting by Olivia Chung, senior Asia Times Online reporter in Hong Kong.
Richard Komaiko researches Sino-American relations, economic policy, terrorism and national security. He holds a degree in economics from the University of Illinois and has studied Chinese language and culture at the University of Illinois, University of Chicago and the Beijing Institute of Education. Chris Stewart is the Asia Times Online Business Editor
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