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Cablegate: Aig Facing Further Regulatory Pressure

VZCZCXRO1281
PP RUEHCN RUEHGH
DE RUEHGH #0419 2691009
ZNR UUUUU ZZH
P 251009Z SEP 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC PRIORITY 7199
INFO RUEHBJ/AMEMBASSY BEIJING PRIORITY 2153
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHGZ/AMCONSUL GUANGZHOU PRIORITY 1407
RUEHHK/AMCONSUL HONG KONG PRIORITY 1591
RHEHAAA/NSC WASHINGTON DC
RUEHSH/AMCONSUL SHENYANG 1430
RUEHCN/AMCONSUL CHENGDU 1436
RUEHGH/AMCONSUL SHANGHAI 7786

UNCLAS SHANGHAI 000419

SENSITIVE
SIPDIS

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

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
operations in Hong Kong, which also strikes us as a likely
pattern for potential future Chinese regulatory steps.

CAMP

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