China's imploding US ally
By Richard Komaiko and Chris Stewart
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.
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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holding the key to successful
development of business in China.
