International Commmentary

China, PNTR and WTOÐPart II

What is the Chinese Market?

The Western world has long had an ongoing fascination with China’s enormous population-1.2 billion and counting. Corporate leaders fantasize that, if only 10 percent of that population bought insurance coverage (or telephones, or electric shavers, or whatever), they’d have 120 million new customers-what an opportunity. Is it? Not really.

In the early 1900s, the U.S. espoused the “open door” policy in relations with China. It sought access to Chinese markets on an equal footing with the European powers, who had already established trading enclaves on Chinese soil. Only partially successful-the Europeans weren’t especially accommodating-it nevertheless gave American companies entry into China, where they prospered after World War I had exhausted their European rivals. It also brought the U.S. into conflict with Japan, which eventually erupted into World War II, and incidentally made possible the founding of American Asiatic Underwriters in 1919, which eventually evolved into AIG.

Fast forward to the end of last month when a delegation led by Agricultural Secretary Dan Glickman visited China in a road show designed to drum up support for passage of the Permanent Normal Trading Relationship (PNTR). If the bill failed to pass, dire consequences would ensue. The U.S. risked “a return to isolationism and loss of global influence.” “The future of our country is in the balance,” warned Democratic Representative Norm Dicks of Washington.

The Chinese leadership has long-term goals. To make certain that China’s prolonged period of weakness is never repeated, its leadership must strengthen the country. This requires the acquisition and use of modern technology, which in turn requires trade and exports. Consequently a limited market for foreign products and services, including insurance, does exist, but only for as long as the Chinese feel they need it.

With 1.2 billion people, it’s natural to assume there is a large potential market, but 50 percent of China’s labor force is engaged in agriculture. “The fastest growing and most affluent industries are largely confined to the coastal enterprise zone regions with perhaps a tenth of the total population,” said Herbert Gooch, chairman of the Department of Political Science at California Lutheran University. “This is roughly equivalent to Japan, but has far less purchasing power.” Such a market doesn’t justify all those CEOs seeing dollar signs and demanding that their companies not be excluded from it.

China’s economy is growing. GDP for the first quarter of 2000 exceeded $200 billion for the first time, an 8.1 percent annual increase. If this continues, China will have GDP of more than $800 billion this year.

To put this in perspective: Spain’s GDP for 1999 with a population of 38.9 million was $590 billion. Korea and Mexico combined had GDP of $885 billion. The U.S. registered $9.1904 trillion. These markets may offer equal, if not superior, business opportunities. Put in those terms, China is still very much a developing country, not a developing market.

If growth continues, its GDP, currently around $670 per capita, will increase, and the demand for foreign products will grow. But, paradoxically, as China forces its industries away from a planned economy and into the marketplace, as it acquires the technology it needs, and the economy grows and becomes more efficient at producing the goods and services its people want, it becomes less, not more, dependent on foreign imports.

Certain segments of the insurance and banking industry, but not all, are exceptions to this analysis. Insurance and finance are economic services, which by their nature benefit from large-scale economies. The insurance business is founded upon the principle of risk management, which in turn depends on spreading risks as widely as possible in order to avoid catastrophic losses in any one sector or geographic area.

It’s counterproductive to try to keep potential risks at home. Big multi-line insurers and reinsurers should therefore have a significant place at China’s table. China needs the expertise and technological sophistication, as well as the capital, that only large global insurers possess. It needs well-capitalized investment banks to establish a presence for the same reason.

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Will American insurers lose out if PNTR is rejected? Some might, but does anyone really believe that big global insurers or brokers will? China will still need their services. Take AIG as an example. It was founded in China, has links there going back 80 years, and was the first to be granted a re-entry license by the government. Is it now going to be excluded if PNTR doesn’t pass? Of course not. Global insurers and brokers can write business from anywhere in the world-London, Singapore, Hong Kong or Tokyo would all be acceptable locations to the Chinese, provided they wanted the business in the first place.

Apart from the real question of defining the actual size of the Chinese market, the main barriers to doing business in China are cultural, not legal. Just because China joins a world organization and agrees to its regulations doesn’t mean that it will apply them. World bodies, treaties and agreements, while helpful and necessary, do not suffice to guarantee one country access to another’s markets, especially countries where the culture is fundamentally different.

PNTR and China’s entry into the World Trade Organization (WTO) seem almost assured. This is probably for the best, as it will make it easier to watch and control China’s trade practices.

In and of itself PNTR won’t open one more McDonald’s or sell one more insurance policy, and it’s not going to change the fundamental way China does business. It might over the long term become an essential part of China’s business culture, and work a lasting effect, but that is for the future.

Finally, opponents see the denial of PNTR as a way of holding a club over the Chinese to influence their behavior. Congress and the Administration have had this power in the yearly “most favored nation” review since 1979; it’s never used it, and never will. What good is it then?

The CIAB, the AIA and other insurance organizations are correct in their efforts to further open the Chinese market for insurers and brokers, but they should realize that the final decisions will be made by the Chinese, using their criteria and pursuing their
interests within their own cultural framework.