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MARKETING OF FINANCIAL SERVICES IN CHINA Financial System in China History of Banking in China Marketing of Banks in China Customer-centric Focus

tric Focus of Banks in China An Example of Agriculture Bank of China Chinas Emerging Insurance Industry Marketing of Insurance in China An Example of China Life Insurance Company Mutual Fund Industry in China Marketing of Mutual Funds in China

Financial System in China China's financial system is highly regulated and relatively underdeveloped, but has recently begun to expand rapidly as monetary policy becomes integral to its overall economic policy. As a result, banks are becoming more important to China's economy by providing increasingly more finance to enterprises for investment, seeking deposits from the public to mop up excess liquidity, and lending money to the government. Financial services in the People's Republic of China refers to the services provided by the finance industry: banks, investment banks, insurance companies, credit card companies, consumer finance companies, government sponsored enterprises, and stock brokerages. Financial reform in China's banking sector include the introduction of leasing and insurance, and operational boundaries are being slowly eroded to promote competition for customers who are now permitted to choose banks as well as hold accounts in more than one bank. History of Banking in China China's banking system is highly regulated with six major banks, each having specific tasks and duties. The People's Bank of China is the largest bank in China and acts as the Treasury. It also issues currency, monitors money supply, regulates monetary organizations and formulates monetary policy for the State Council. The Bank of China manages foreign exchange transactions and manages foreign exchange reserves. The China Development Bank distributes $foreign capital from a variety of sources, and the China International Trust and Investment Corporation (CITIC) was previously a financial organization that smoothed the inflow of foreign funds, but is now a full bank, allowing to compete for foreign investment funds with the Bank of China. The China Construction Bank lends funds for capital construction projects from the state budget, and finally the Agricultural Bank of China functions as a lending and deposit taking institution for the agricultural sector. China has been dominating the world economy for many years, but still it has been able to create a customer base in its own economy, Chinese economy largely depends on the production and

exports, but building up large industries that attract the customer base nationally is far more than the international standards. It could be said that, China is not only coming up with new ideas of production with different merchandise and products, but it is also making its major asset, which is Agriculture stronger. This is happening through such companies as ABC, the more it does well, the better and stable the economy tends to be. Marketing of Financial services in China has taken up a big step toward attaining the international goal that it has been aiming at for the past many years.

Marketing of Banks in China Expansion abroad is a top priority for China's financial institutions. Given the current worldwide financial crisis, and relatively large amounts of liquidity at their disposal, Chinese banks are in a good position to make meaningful progress towards this goal. 100% of large industry leaders interviewed have already started moving overseas, and all respondents have either begun the move or plan to begin within the next five years. However, there is fear right now of the Chinese Government that too much loss will be incurred by financial institutions if they go abroad and buy non-transparent financial assets which will slow some of the acquisitions. Perhaps its experience with Non-performing Loans (NPLs) makes it cautious. For instance, the Bank of China has not gotten final approval yet for its announced 20% stake in Rothschild. Expect this cautious note to prevail for the next several months as the China Investment Corporation (CIC) has been burned with investments in Morgan Stanley (MS) and Blackstone (BX). While the CIC is an investment vehicle and not an actual bank like an ICBC, the experiences of CIC clearly is influencing all relevant regulatory bodies in China and making them think thrice before giving approvals. Motivations Chinese financial institutions initially moved overseas to serve corporate clients expanding their businesses abroad. Maintaining these clients' business is a top priority today as well, as increasing numbers of Chinese companies move overseas, and competition increases at home with the influx of foreign banks like Citigroup and Standard Chartered. These initial moves abroad came about via organic growth as well as M&A. Perhaps most importantly, Chinese banks are viewing expansion abroad as a way to get training in management, organization, and risk assessment. ICBC paid $5.6 billion USD for a 20% stake in South Africa's Standard Bank last year, for example, not only to better serve the growing ranks of Chinese companies doing business in the region, but to learn technical skills, management and operation techniques directly from their partners. These ventures are opportunities to train their own talent and to attract foreign talent for their future overseas expansions. Current Situation and Methods of Expansion Chinese financial institutions are using M&A to build more quickly a meaningful strategic presence abroad. The first major stake by a mainland Chinese bank in a European bank was

made in July, 2007, when the China Development Bank (CDB) purchased a stake in Barclays Bank in order to help finance the British group's bid for Dutch ABN AMRO. While Barclays did not ultimately win the bid, CDB successfully established partnership with one of the top global commodity banks. CDB expects to learn from Barclays expertise in global commodity markets, investment banking, and risk management. The first strategic investment by a mainland Chinese bank in a U.S. bank was made last October when China Minsheng Bank bought 5% of UCBH Holdings, the holding company of San Francisco's United Commercial Bank, a bank catering mainly to small and medium-sized local Chinese-American run businesses. Minsheng purchased another share in March for a total 9.9 percent share valued at 2.5 billion RMB ($317 USD). Minsheng intends to purchase another 10 percent. Last November, China's Ping An Insurance Company became the largest shareholder in Belgian financial company Fortis N.V., having acquired a 4.18% stake for 1.81 billion ($2.7 billion). This past March they upped that stake to 4.99%, in addition to purchasing half of Fortis' asset management business for 2.15 billion. The business will be rebranded as Fortis Ping An Investments. As recently as September 2008, Bank of China announced its plans to purchase a 20% stake in French bank LCF Rothschild for 236.3 million euros ($340 million USD). The two banks will work together to develop asset management services for China's newly wealthy once approval is given. Challenges Chinese financial institutions' push overseas will not be without its challenges. Chinese banks still face significant rules and regulations, as well as a degree of suspicion and protectionism as they move to expand abroad. One of the main reasons UCBH was willing to partner with Minsheng Bank, for example, was, as a private bank Minsheng had minimal connections to the government, and thus the partnership was more likely to be approved by the Fed. Satisfying requirements of regulatory bodies like the Fed, and learning how to operate under these rules in a new business environment were considered key challenges by a majority of respondents. As mentioned previously, in addition to financial return on investment, Chinese financial institutions' push to acquire stakes in international heavyweights is in large part to get access to management, organizational, and technical expertise not yet fully developed at home, and assistance in developing new service areas, such as wealth management in the case of Bank of China and LCF Rothschild. Companies overwhelmingly agreed that finding people with experience in leading a cross-cultural operation overseas, and people with the necessary technical, managerial, and/ or operational skills is a top challenge in their push abroad. With the Wall Street calamity, Chinese financial institutions have been increasing their recruiting of mainland Chinese who worked in Wall Street and are now vying to come back to China. Going Forward While Chinese financial institutions are still in the early stages of moving abroad, this presence was increasing rapidly as Chinese banks conduct M&A in target areas until the financial crisis. These institutions are generally moving first to developing regions, where the business of their Chinese clients is increasing most rapidly, though they continue to work towards building

presence in North American and Western European countries as their ultimate goal. Expect the pace of M&A to slow down a bit as a note of caution prevails but the long-term trend is clear. Chinese financial institutions need time to find and train the right talent, as well as time to improve operations and organizational structure to be competitive in international markets. Banks should continue to view expansion methods such as M&A as an opportunity to learn and strengthen the skills they currently lack in addition to a fruitful investment. It is also important for the larger banks to adapt and become more client focused. Too many of the big banks -- Bank of China and ICBC for instance -- focus more on State-Run Enterprises and on political issues than on developing the services that cater to the needs of SMEs and retail clients. In the China market, they lag behind nimbler private banks like China Merchants Bank in customer satisfaction. Customer-centric Focus of Banks in China Chinas recent accession to the World Trade Organization (WTO) will create opportunities for foreign and domestic players seeking to tap into the countrys booming market for retail financial services. But before these companies can cash in, they will have to overcome some hurdles, even as the demands of Chinas most profitable banking customers redefine the competitive landscape. Indeed, a recent survey suggests that changing consumer preferences may have a more immediate impact than the WTO-mandated regulatory reforms. Although some product markets will open up for foreign institutions, the playing field will not be as level as many had expected. Foreign banks wont, for instance, be able to collect deposits in Chinas currency, which will limit their ability to finance such potentially lucrative products as mortgages and car loans. Yet Chinese banks, which make little attempt to target particular customer segments, will have to become far more savvy or risk losing their local dominance. At stake is an enormous, largely untapped market for financial services: only 1 percent of Chinas consumers hold credit cards, for instance, versus 62 percent in Taiwan. Several years of rapid economic growth and rising household incomes are putting these markets up for grabs. Today, about 30 million urban households are considered middle income or above, defined as earning more than $4,300 a yearenough to make them targets for many financial products. This segment is growing rapidly, roughly doubling in size every two years. Further, as many as 4 percent, or 1.2 million, of these middle- and upper-income households hold deposits of $100,000 or more. In fact, this affluent sub-segment holds fully 50 percent of all retail bank deposits in China and generates more than half of the profits of the countrys entire banking sector.

In addition, Chinese consumers are becoming enthusiastic borrowersand investors. In a 2001 McKinsey survey of the attitudes of middle- and upper-income urban consumers toward retail financial services, 38 percent of the respondents considered it unwise to borrow money except for a house, down from 52 percent a year earlier. They also proved to be more risk tolerant than their counterparts in other Asian markets: only 39 percent said that they preferred bank deposits to securities (as opposed to the Asian average of 63 percent), and 38 percent of upper-income Chinese actually hold securities, the highest percentage in Asia. Banks that partner with securities brokers, insurers, and other providers of investment products stand to gain from this risk-taking impulse.

Wealthier customers tend, however, to be less loyal than others; they are constantly searching for better alternatives. Fully 73 percent of the respondentswell above the Asian average of 56 percentagreed that shopping around for financial products is worth the effort. These upscale customers opened new accounts at more than twice the overall rate of Asian consumers.

But such Chinese customers dont necessarily open their accounts at their current banks. About 20 percent of the best customers of one traditional, "big four" Chinese bank, for instance, have switched their primary banking relationship since 1999. Government regulations make the product offerings and interest rates of Chinese banks basically identical, so these churn rates suggest deep dissatisfaction with the incumbents service standards. Indeed, many affluent Chinese customers have fled the large banks for new, consumer-oriented competitors. These changing consumer attitudes and behavior bode ill for the large, traditional Chinese banks. Meanwhile, competitors seeking to tap the growing market in China will need to know where the real opportunities lie. Identifying the most profitable product areas and those that will open up to new local entrants and foreign institutions most quickly is crucial. Clearly, one product to start with is credit cards, whose interest rates are fixed by law at 16 percent, allowing companies that manage risk well to earn lucrative returns. Chinese banks, for their part, must do several things to prepare for global competition. First, they should upgrade their customer databases and management information systems to assess the performance of each branch or product line more satisfactorily, to identify their best customers, and to track the profitability of various customer segments. Then they must segment their customer base quickly and offer more distinctive, higher-quality products and services to the most attractive segments. If Chinese banks dont do so, their competitors will happily cherrypick the most profitable customers.

An Example of Agriculture Bank of China

The Agricultural Bank of China (hereafter referred to as ABC or the Bank) is the first commercial bank established in the People's Republic of China in 1951 and the State's first specialized bank set up after the reform and opening-up of the country in February 1979. Ever since its establishment, the Bank has been playing an important role in China's rural economic sector ABC is committed to serving agro-related sectors and dedicated to providing first-class financial services to both urban and rural clients. With full international capabilities, an innovated business model and prudential operations, the Bank provides tailored services to communities both at home and abroad. Based on its large physical and electronic network and diversified products, ABC is striving to build itself into a modern universal bank with a sustainable development outlook.

Banking and financial services provided by ABC Agricultural Bank of China provides various banking and financial products and services in China. It provides its products under the brand names of Golden Key, Golden Way, Golden Online, Golden Harvest, and Kins Card. Its corporate banking products and services include deposit products, such as corporate demand, time deposits, corporate foreign exchange demand deposit, corporate foreign exchange time deposit, and financing and credit facility, including fixed asset, working capital, and real estate loans, international trade finance, payment and settlement; cash management; trading; investment and wealth management; investment banking; custody; financial institution services; and services for small and medium sized businesses. Marketing Strategies of ABC The "Chamber Escape" is a brand marketing activity of ABC, pioneering among the peers by means of online games, starting last year. Interesting and interactive, the "Chamber Escape" simulates the financial problems encountered in real life, sets different levels, and implants the business functions and operating processes of ABC e-banking into the different levels. Until now, the activity has had more than 500,000 participants and received wide recognition for ABC e-banking products and ABC e-banking brand of Golden Online, laying out a foundation for the expansion of ABC e-banking business and fulfillment of effective transfer of targeted customers.

GOLDEN KEY

This is a "Golden Key" to usher in a new era of ABC's personal banking services. The two hollowed heart shapes on the key are connected by the emblem of ABC, indicating that the brand is what customers want and need. The knife-shaped coin part suggests that Golden Key products and services are easy to be obtained and are of enough varieties to meet the different needs of customers. This is a "Golden Key" for billions of customers to open the door to a new world and better future. The key is designed to showcase dignity and affluence and suggests that the brand will help customers achieve success and build a better life.

The combination of images with Chinese characters and English letters indicates the integration of tradition and modernity and the connection between the present and the future. It is a display of reputation and achievement and a symbol of honor and cooperation. Such a design makes the brand easy to be recognized and leave customers the impression of being secure, efficient, reliable and aspiring.

Slogan: Open the Door to Wealth, the Key to a Better Life The verb "open" echoes with the image of Golden Key and conveys the right information to customers. "Open the Door to Wealth" indicates that Golden Key helps customers create and manage wealth like a life companion. "The Key to a Better Life" indicates that with the help of Golden Key customers can enjoy a wealthy and happy life.

GOLDEN WAY

An Insight into the Brand: "Golden Way" is their brand of offering corporate banking services. It covers mainly corporate

deposits and loans in RMB and foreign currencies as well as intermediary business tailored to customers' needs.

What the Brand Has to Offer: All-Around Banking Services With a dedicated team of professional financial experts, it aims to integrate our financial resources to provide our customers with all-around solutions, addressing comprehensive financial concerns of customers during critical stages of growth. Professional Financial Partner It is their tradition to innovate and pursue excellence. In serving businesses, what ABC sees is not just customers' needs of immediate growth but also customers' future development. ABC's main concern is to help customers' grow their business and to create everlasting sustainability of their businesses.

Slogan: With Shared Vision, We Work Together for Future Success. By "with shared vision", it is committed to being a true friend to its customers. It shares the same aspirations and focus on developing trust between each other.

By "we work together for future success", it aims to develop a long-run partnership with customers and help them grow in a sustainable manner. This is what a professional financial partner should offer. Moreover, in light of its shared vision, they can help each other grow stronger and achieve more as they reach new heights together.

GOLDEN ONLINE

"Golden Online" is a brand of e-Banking service based on modern electronic and information technology, including such transaction systems as: online banking, telephone banking, selfservice banking, TV banking (home banking), and service systems (i.e. customer service center, SMS Express and website). Golden Online features all-around, flexible and easy management of customers' accounts, funds and investments with secured technical support.

Features

Secure They take the security of e-banking seriously and have taken strides to ensure the best operational and technical security for customers. The worlds most reliable and secure communications protocol as well as the latest encryption technologies, such as certificate authentication and digital signature are employed in our online banking system. They use USB-KEY, dynamic password keyboard and the graphics code to provide the best transaction security for their customers. Besides, they watch closely the operation of the system and keep product development on track to prevent systemic and operational risks, thus promoting the sound and rapid growth of our e-banking business. Easy Golden Online represents 3A (Anytime, Anywhere, Anyhow) service. Individual customers or enterprises can have easy access to online payment, group finance, cash management, online fund marketing, roaming remittance, and others through the online transaction system. Fast Customers can enjoy many efficient financial services of ABC like online trading and online consulting simply by the click of a mouse, making a call or sending a SMS message.

Golden Online banking offers customers with secure, easy and fast access to online financial services. ABC online banking was awarded the title of "The Best Online Banking Service of 2009" at the "Impact on China" Tencent Online Service Awards Ceremony 2009. By the end of 2009, over 22 million registered customers of ABC's individual online banking made more than 1.4 billion transactions through the platform, creating a total transaction value of RMB16 trillion. ABC's online banking is committed to enhancing users' experience and meeting individualized needs. The new personal online banking introduced in June 2009, for example, is a platform with upgraded functions, interfaces, individualized settings and security, offering such new services as real-time inter-bank transfer, micro-finance to farmer households, self-service revolving loans, fund collection and automated transfer.

ABC's new online banking won the award for "Excellent Banking Product" at the 2009 China International Exhibition on Financial Services held on September 5 with the theme of Achievement, Challenge, Opportunity and Confidence. This newest, redesigned online banking platform was launched on June 6, 2009, an accomplishment made possible by ABC through years of information collection and work flow innovation based on the rapid development of ebanking.

Dedicated to enhancing users' experience and meeting individualized needs, the e-banking platform boasts upgraded and optimized interfaces, menus, individualized settings, functions and security, and have proven popular among customers for offering more services, better performance, higher security, easier operation and smoother procedure.

ABC Bank Wins the Bronze Award in the Marketing Competition. After two months of intense competition, "Chamber Escape" e-banking online interactive activity (the "Chamber Escape") designed by ABC stood out from the other competitors and won the bronze award in the "MIND Award Tencent Mind Practical Marketing Competition". ABC is the only winner from the financial sector. The competition jury consisted of marketing experts, scholars and celebrities experienced in advertising and marketing sectors; they followed the standard of "Measurable Effect, Interactive Experience, Diverse Positioning, and Precise Orientation" and examined the entries from the aspects of media strategy, execution effect, creative design, and marketing effect and more. The competition received about one hundred entries, covering six industries including IT home appliances, fast moving consumer goods, transportation, daily chemical products, clothing, finance and others, among which there were some influential large-scale international corporations and multinational corporations such as Lenovo, BMW, Dior and China Mobile. Experts' analysis found that the large number of entries, the broad covering of industries, the comprehensive application of online marketing, the creative ideas of the entries, and the high authority of the professional jury made the results of the competition unprecedented in the online efficient marketing sector.

GOLDEN HARVEST

As the first brand of agro-related financial services, Golden Harvest pioneers a new way to serve the farmers. Services under the brand cover eight major fields including farmers' work and life, development of modern agriculture, rural commodities distribution, development of rural small and medium-sized enterprises (SMEs), rural infrastructure development, resource development, rural urbanization, rural social undertakings as well as cooperation with other financial institutions.

Benefits Benefits to Agro-related Sectors Golden Harvest provides financial products and services for target customers such as the industrialization of agriculture, rural commodities distribution, infrastructure development, construction of small towns, featured resource development, growth of SMEs, farmers' work and life and public financial institutions in rural areas so as to boost agricultural production, promote rural economic growth and increase farmers' income. Benefits to China As the Chinese old saying goes, when people are affluent, the country is strong. ABC's delivery of financial services to agro-related sectors helps to improve the rural financial system, promote the coordinated development of urban and rural areas and support the development of new socialist countryside.

Slogan: Bring Benefits to Agro-related Sectors The slogan highlights ABC's sense of social responsibility as a major responsible stakeholder. The word benefits indicates that ABC brings tangible benefits to agro-related sectors with financial services. The slogan embodies the essential value of Golden Harvest, namely benefiting agro-related customers. The stress falls on "agro-related sectors" which make up the majority of China's population, a very big group of customers for ABC.

AGRICULTURAL BANK OF CHINAs IPO Agricultural Bank of China priced its Hong Kong and Shanghai dual listing a deal that would break all IPO records by raising more than $22 billion when adding in over-allotment shares. China's third largest bank by assets was able to pull in strong demand for the IPO. ABC, the last of China's big banking institutions to go public, has a sprawling network of branches in China's rural parts but also a presence in its major cities as well. The Greenshoe Option Greenshoe options typically allow underwriters to sell up to 15% more shares than the original number set by the issuer, if demand conditions warrant such action. However, some issuers prefer not to include greenshoe options in their underwriting agreements under certain circumstances, such as if the issuer wants to fund a specific project with a fixed amount of cost and does not want more capital than it originally sought. A provision contained in an underwriting agreement that gives the underwriter the right to sell

investors more shares than originally planned by the issuer. This would normally be done if the demand for a security issue proves higher than expected. Legally it is referred to as an overallotment option. A greenshoe option can provide additional price stability to a security issue because the underwriter has the ability to increase supply and smooth out price fluctuations if demand surges. ABCs IPO is Chinas largest IPO till date.

As the IPO suggests, ABC the only company to reach its public issue targets as high as it shows above. Agriculture Bank of China, despite many rising issues that led to the delay in their entry into the market, managed to come up with the IPO that turned the company around in great way, and created its footsteps in one of the largest economy of China. For a country like China, Initial Public Issue is a major marketing technique that could do wonders for the economy; it not only attracts foreign investors, but also investors and entrepreneurs at local as well as national level. It is basically an internal source of marketing, which creates attractiveness toward customer at large and small scale. Thus, we can say that, public issues is one step closer for reaching the goal for a country like China, whose at maximum relies on its exports and customer base outside the country rather than inside.

Chinas Emerging Insurance Industry 1. The Role of Foreign Direct Investment in China, 1979-2000 Since 1995, China has been the largest recipient of foreign direct investment (FDI) in the developing world, receiving US$ 40.8 billion in 2000. By end of May 2001, China had absorbed a total of about US$ 363.6 billion of FDI. From 1980 to the end of May 2001, these FDI funds had been invested in more than 370,000 enterprises, of which more than 200,000 were still operating, mostly in China's coastal cities. Recently FDI has been directed toward enterprises in China's less developed central and western regions. FDI has played a significant role in China's economic growth. From 1980 to 1999, about 2.7% of China's 9.7% yearly average Gross Domestic Product (GDP) growth had originated from FDI. Foreign funded enterprises currently employ about 20 million Chinese workers, or about 10% of China's urban labor force. 400 of the world's largest 500 international companies have invested in China. The FDI is invested largely in China's light and heavy industries, and in export processing. In areas such as financial services, where FDI has so far been more modest, FDI has still played an important and growing role. In this paper, we will examine the role of FDI in one area of financial services, the insurance industry. 2. The Insurance Industry of China Before 1949, most of China's insurance industry was controlled by foreign companies operating from Shanghai. The current largest insurer in United States, American Insurance Group (AIG), was founded in Shanghai in 1919. Most other insurers were large foreign companies that left China entirely after 1949, though some retreated to Hong Kong. From 1949 to 1976, the insurance industry in China essentially ceased to exist. Few Chinese owned personal property, and almost all businesses enterprises were government-owned and "self-insured." Beginning in 1978, as part of the Deng Xiaoping-initiated economic reforms and open door policies, China began to resume the insurance industry through the reestablishment of the People's Insurance Company of China (PICC), which had a monopoly position in China's emerging insurance market. In 1996, PICC was divided into three independent companies, overseen by the People's Bank of China. Finally, in 1998, the PICC group was disbanded and, the 3 PICC companies were renamed: China Life Insurance, China Property Insurance (PICC), and China Reinsurance. In November of 1998, the State Council devolved supervision functions 3from the People's Bank of China to the newly established China Insurance Regulatory Commission (CIRC). Since 1998, CIRC has grown to a nation-wide network of 33 branches overseeing China's rapidly modernizing insurance industry. Foreign enterprises began to play a role in the revival of China's insurance industry beginning in 1992. In September of 1992, the People's Bank of China granted AIG a permit to begin selling individual life and property insurance in Shanghai. Several years later AIG reoccupied its

original building on the Shanghai Bund and expanded its business to include Guangzhou and then Shenzhen. From 1992 to 2000, China gradually approved the re-entry of 16 additional leading foreign insurers, many of whom had operated in China before 1949. 3. Importance of China's Insurance Industry The insurance industry plays a number of important roles in China's modern economy. Insurance is necessary to protect enterprises against risks such as business failure, and fire and natural disasters. Individuals require insurance services in such areas as health care, life, property and pension. The insurance industry also provides crucial financial intermediary services, transferring funds from the insured to capital investment, a critical need for China's continued economic expansion. As China has transformed its economy from a centrally planned to a market-oriented one, initiation and development of insurance service industries have been necessary to support continued economic transformation. Foreign insurance companies have been invited by the Chinese government to play an increasingly important, though carefully restricted, role in China's economic modernization. After 20 years of successful economic reform, China is currently facing some difficult but critical economic issues, such as State Owned Enterprise (SOE) reform, which is related to equally important banking reforms. And both areas of reform require a sound and efficient insurance service industry. Vital social security and pension reforms also need the benefits of a mature insurance industry. And finally, the success of these reforms is a prerequisite for China's social stability, which is a necessary political condition for sustaining China's economic growth. Because insurance is such a strategic industry, the Chinese government on the one hand has opened the insurance industry to foreign investment and assistance. On the other hand, it has carefully regulated the speed and scope of foreign involvement in order to protect China's still nascent domestic insurance industry and to match insurance industry growth with society's demand for insurance services. Foreigners have been motivated to enter China's insurance industry by their desire to participate in the largest potential insurance market in the world. In 1980, when the insurance market was first reopened as part of the post-1979 financial reforms, insurance premiums totaled only RMB 640 million (US$ 77.4 million). Beginning in 1980, China's insurance market grew at an average rate of 26%, reaching RMB159 billion (US$19.2 billion) by the year 2000, a 249 fold 4increase. Even with the impressive current growth rate, China's insurance market is still small compared with other foreign insurance markets. For example, the Chinese insurance density (premiums per capita) was RMB127 (US$15.30) in 2000 while the world average was US$ 360. The market penetration (percentage of premiums in GDP) was about 1% of China's GDP, compared with world levels of 6-7%. Another measure of the current small size of China's insurance market is that its total assets are RMB 337.4 billion (US$ 40.7 billion), while an international mediumsized insurance company has assets of over US$ 100 billion.

China's market was also small compared with other developing countries. For example in 1996, Chinese per capita spending on insurance was US$ 7.64 compared with Thailand, US$30, though already much higher than in India at US$1.7. Given that China's economy has grown at about 8% per year since 1979, even surviving the Asian financial crisis, most foreign investors, including those in the insurance sector, do not want to be left out of the most rapidly expanding and largest potential insurance market in the world. 4. Foreign Direct Investment in Insurance After China opened its doors to the world economy, it began to invite foreign insurance companies to participate in China's emerging insurance industry. As with other economic sectors, foreign insurance participation in China was subject to requirements and regulations aimed at maximizing Chinese benefit while allowing foreign insurers to participate in China's long-term economic growth. China's strategy for gaining benefits has evolved slowly over the last 9 years. It has included a number of requirements aimed at making the opening gradual and matching the growth of China's insurance industry with its slowly emerging insurance needs. Before 1980, China lacked most aspects of what is usually found in a mature insurance market, such as legal structures and regulatory institutions, trained personnel, a competitive market environment, consumer awareness, experience with insurance products and services, and the necessary financial infrastructure. Given the extremely underdeveloped nature of China's insurance industry before 1980, the government decided to establish a number of stringent requirements on foreign insurers wishing to enter China's infant insurance market. In addition to general requirements asked of all foreign direct investment (official evaluation and approval, corporate charters, feasibility studies, market research, and foreign exchange control), foreign insurance companies were also subject to sector specific requirements, both explicit and implicit. In applying for a business license, a prospective foreign insurer would have to meet the following formal criteria:(a) To operate a representative office (where no business could be conducted) in China for a minimum of 2 years (b) To have parent company assets exceeding US$ 5 billion for a year prior to application (c) To have at least 30 continuous years of experience in insurance underwriting (d) For the applicant home country to have a sound financial regulatory and supervision system. In addition to formal criteria, a number of informal factors have in practice influenced the China insurance permit approval process. First, the company must demonstrate a long-term commitment to China, by among other things, offering financial seminars, setting up research institutes, and making financial investments in both Chinese educational institutions and in industrial sectors. Second, Chinese authorities have approved companies based on the quality of government-to-government political and economic relations and in meeting Chinese foreign

policy goals. Third, historical relationships between the company and China have factored into approval decisions. For example, AIG was the first company to be approved and the only foreign company to be granted 4 licenses to sell both life and property insurance in three cities. Finally, Chinese authorities tried to maintain a world -wide geographic balance when granting permits to sell insurance. If an applicant meets the formal and informal requirements, they have a chance to receive one of the limited number of "Insurance Institution Legal Person Permits" from the China Insurance Regulatory Commission set up in 1998 (and before that from the People's Bank of China). Over the last 9 years, 19 permits have been issued, an average of 2 per year. Given that 89 other foreign companies have set up more than 200 representative offices and usually waited as long as 7 years in hopes of gaining permission, this seems like a small number. ING Insurance, a division of Netherlands ING Group, opened its first representative office in Shanghai in 1993 and received its Joint Venture Life Insurance permit in 2000. Minsui Marine Insurance Company Ltd., the third largest property insurer in Japan, has set up representative offices in seven Chinese cities since 1981, but only received approval in the year 2001, 20 years later, to open its first Chinese branch in Shanghai. Although the pace of approval was slow, the 19 foreign insurance companies approved by the end of the year 2000 were still more numerous than the 17 domestic companies so far licensed to operate in China's insurance sector. There are a relatively few number of domestic insurers because Chinese companies have also been subject to many requirements and restrictions. The total number of insurance companies in China could be many more. For example, there are 40 different insurance companies serving the 6 million people of Hong Kong. After receiving a Permit, the prospective foreign company must then meet additional regional and business requirements to obtain a business license from a local Administration of Industry and Commerce Bureau. Certain kinds of foreign insurance licenses require the forming of a joint venture with a government approved domestic company. For example, all foreign companies wishing to sell life insurance (except for AIG in 1992) have had to choose a joint 6venture partner from among government-approved partner companies, both insurance companies (such as Dazhong Insurance, China Pacific, and China Life), and other major Chinese enterprises (such as SinoChem, CITIC, China National Metals and Mining, and China Oil and Gas Group). For selling property insurance, a partner is not necessary but is permitted. Reinsurance business is closed to foreign insurers. After finding a partner, if required, and receiving a business license, a foreign insurance company can begin to engage in insurance underwriting, but it still will face additional restrictions. First, its license is limited to only one of three locations in China's coastal areas: Shanghai, Guangzhou, or Shenzhen, with 13 of 19 licenses issued for operating in Shanghai. Recently the Chinese government has permitted foreign insurance operations to expand to selected regions and cities adjacent to these three cities. Second, foreign companies can only sell insurance products specified in their licenses. For example, they can sell either only life (with a Chinese partner), or, property. In addition, the foreign life insurance joint venture (JV) can only sell individual, not group, insurance to foreigners and Chinese, whereas Chinese domestic insurers can sell group life insurance policies.

Also, companies approved to underwrite property insurance can sell only to foreign invested companies. Premiums collected by both foreign and domestic companies can only be channeled into a limited number of investment instruments (bank deposits, treasury bonds, or close-end stock funds. Other limitations on the activities of approved foreign insurers include prohibition against Chinese citizens acting as general managers; Chinese partners usually act as Chairmen of the Board). In addition, all foreign insurance companies are required to have 30% of their insurance policies reinsured by the only domestic reinsurance company, the China Reinsurance Company. For Chinese domestic insurers this requirement is 20%. There is a capital requirement for all insurance companies, foreign and domestic. Registered capital should be at least RMB 200 million (US$ 24.2 million) for operating in one location. A RMB 500 million (US$ 60.5 million) minimum is necessary for nationwide operations, though so far only Chinese companies have been given permission to operate nationwide. If foreigners form a JV, they need a minimum of RMB 200 million of registered capital. So far, all JV companies have been permitted to carry out only local operations and most JVs have had 50/50 percent ownership, requiring foreign and Chinese partners to each invest a minimum of RMB100 million (US$12.1 million). There is one alternative method for foreign investors to tap directly into China's growing insurance market. Since 1999, CIRC has permitted foreign investors (some insurance companies and some other financial companies) to own up to 25% of selected Chinese insurance companies with each individual foreign investor owning no more than 5%. CIRC has encouraged Chinese companies to increase their capital base through such foreign participation in order to strengthen them for the coming WTO market competition. For example, Xinhua (New China) Insurance, China's fourth largest national insurance company, has been developing rapidly since its establishment in 1996. Recently it sold 24.9% of its equity for US$116.9 million to five foreign investors including Zurich Insurance Company, the International Financial Corporation (a member of the World Bank), the Japan-based Meiji Life Insurance Company, Holland Financial Services Company, and a fifth unnamed company. This sale greatly increased Xinhua's capital base. The five Xinhua foreign investors have also agreed to provide advanced technology and management know-how. China's fifth largest life insurance company, Taikang Insurance, has been similarly approved for foreign investment and has also successfully carried out a year-long international private placement. The company's new foreign shareholders include Winterthur Life and Pensions (WLP), The Government of Singapore Investment Corporation (GIC), and Japan's Softbank, all world-class financial powerhouses. Foreign shareholders will buy a total of 2 million shares, or 25% of its total shares outstanding. Foreign shareholders have also agreed to provide comprehensive assistance to Taikang in terms of technology, staff training, & e-commerce, and send their experts to Taikang for diagnosis of company management and practices, leading to specific recommendations for improvement. Because of the many restrictions to entry, foreign companies have so far only participated in a limited way in China's insurance market development. Since 1992, of the 19 approved foreign insurance companies, most are currently operating in China. But, they still have gained only a small fraction of China's insurance market. For example, in the first quarter of 2001, the total premiums for the entire Chinese insurance industry was RMB 43.76 billion (US$ 5.29), of which foreign-invested insurance companies received only RMB 711 million (US$85.87 million), or a

1.6% market share. Foreign premiums were up 37.52% the first quarter of 2000, slightly higher than domestic competitors' premiums, which rose 34.26%. AIG, the first foreign company to enter the Shenzhen life insurance market in October of 1999, received RMB 7.78 million (US$.939 million) in the first half of the year 2000. But their market share was only 1% of the Shenzhen life insurance market, with China Life holding a market share of 43.67%. AIG's premium income from new policies surpassed the third largest life insurer in Shenzhen, China Pacific Insurance, and they have rapidly expanded their employee from just over 100 when they opened to the current level of 500. In addition to governmental restrictions and regulations, foreign insurance companies have also faced a number of Chinese market challenges. Joint venture management appears to be very difficult in China. For example, recently, three experienced senior managers of Sino-foreign JVs were removed from their management positions in AXA Minmetals Assurance Co (France), Allianz Dazhong Life Insurance Co. (Germany), and China Life and Colonial Life Insurance Co.(Australia). There are a number of reasons for the management challenges. First, there are cultural differences such as conflict between the JV partners and lack of mutual trust and agreement on management practices. For example, AXA Minmetals had seven managers from four different country-regions. The managers with different cultural backgrounds had different points of view on many management issues such as the insurance market, marketing insurance products, and employee compensation. They also had to answer various questions from AXA headquarters some 8,000 miles away. Second, China's insurance market is constantly changing. There are more competitors every year. For example, in 1996 in Shanghai, there were five insurance companies, but by 2001, there were more than 20, 10 of which were selling life insurance. Therefore market research done five years ago is obsolete, making a huge gap between market data and actual operations. Third, there is a lack of familiarity with the Chinese business climate leading to problems in the localization of international enterprises. Companies such as AXA, Manulife, and AIG, some of whom have had many decades of international insurance experience including in Hong Kong and pre-1949 China, have found many difficulties applying their experiences in the current Chinese market. For example, the foreign companies did not realize that many Chinese today have more interest in insurance or financial products that are closely linked to investment and financial management. Another social change in China that has affected marketing insurance products as well as doing business in China generally is that the traditional central role of "guanxi" has gradually diminished and Chinese customers therefore must be approached not only through their social groups but also as individuals. 5. Impact of the WTO Accession Agreements on China's Insurance Sector China's WTO accession agreement has included a number of commitments to further open China's financial services industry, including the insurance market. Among the commitments are:

(a) China will permit foreign property and casualty firms to insure large-scale risks nationwide immediately upon accession and will eliminate all geographic restrictions within three years of accession. (b) China will expand the scope of products for foreign insurers to include group, health, and pension lines of insurance (together about 85% of China's current insurance market) over five years. (c) China will award licenses based solely on prudential criteria, with no economic needs test or quantitative limits on the number of licenses granted. (d) In terms of investment, China will allow foreign ownership of JV life insurance companies to be up to 50% (no change), but be able to freely choose a joint venture partner. (e) China also will allow up to 51% ownership in non-life JVs and permit the formation of wholly foreign subsidiaries within 2 years, and the reinsurance business will be completely open to foreign investors upon China's WTO accession (100% with no restrictions). These changes should vastly accelerate the license granting process during the next five years, and consequently increase foreign competition in China's emerging insurance markets. For example, most of the 89 foreign companies with representative offices should now be able to obtain licenses to underwrite casualty insurance anywhere in China. In terms of life insurance, they will be able to freely select JV Chinese partners to operate anywhere in China. Foreign companies should also be able to enter the reinsurance market without restrictions. An important area of competition will be for trained and experienced Chinese personnel. Even though there has been a rapid expansion in insurance training programs, the expected expansion in the number of foreign insurance companies will translate into vastly increased demand for Chinese insurance industry experts. Foreign companies will be able to offer better compensation packages and career development opportunities to attract Chinese talent. Another area of competition will be for the public's confidence. Currently it is difficult for Chinese customers to differentiate between foreign and domestic insurance products. Competition will focus on gaining the confidence of China's growing base of insurance consumers. Foreign competition will greatly increase because foreign companies can bring rich experience in developing and marketing various kinds of insurance products and services, but all products and prices must be approved by CIRC. For example, AIG brought aggressive door to door sales techniques to Shanghai's individual life insurance market. 6. China's Insurance Industry Preparations for the WTO Accession The Chinese government has taken a number of steps and measures to prepare China's insurance market for the post-WTO accession competition. (a) China is improving the legal structure by having CIRC issue new regulations for insurance firms in general and also for foreign-funded insurance firms. China is considering amending its

basic insurance law in the near future. CIRC has already set up a nationwide regulatory framework with 33 branches throughout China in preparation for the expansion of China's insurance industry, by both domestic and foreign companies. (b) In order to further develop its insurance market structure, China is taking aggressive measures to develop its intermediary insurance market by having CIRC approve three Chinese insurance brokers, by the setting up of 33 Chinese professional agents and by the approving of 3 loss adjusters. CIRC has approved an increase of four new insurance companies, Minsheng, Oriental, Shengming and Heng'an, to provide partners for foreign life insurance companies and to increase the number of Chinese companies to 17. CIRC granted these and other Chinese insurance companies the rights to operate in more Chinese locations. Two sub-companies of China Reinsurance Company have been opened to increase China's ability to offer reinsurance products. (c) In order to strengthen Chinese companies in their coming market competition with entering foreign insurers, CIRC has encouraged domestic insurers to seek international private placements to increase their capital basis. Taikang and Xinhua, for example, have both completed private placements in the year 2000 that have greatly increased their capital. The three largest stateowned insurance companies, China Life, PICC, and China Reinsurance, are considering selling shares of their branches to Chinese institutional investors in order to increase their capital and pave the way for future public listing. In 2000, PICC and China Life have reorganized their operations and streamlined their workforces by 8,000 and 383 respectively. Many Chinese insurance companies have made alliances with banks and other financial institutions to strengthen their marketing and customer service capabilities. Pingan Insurance Company and Guangdong Development Bank have teamed up to offer credit card service to their customers. The Industrial and Commercial Banks of China (ICBC, China's largest commercial bank) and the People's Insurance Company of China signed an agreement for long-term "all around" cooperation, where they will act as each other agents, and where ICBC will collect insurance premiums and pay claims on behalf of PICC. Chinese companies have also been encouraged to develop new insurance products, such as Pingan and Xinhua Life's new "unit-link" policies, tying insurance products more closely to financial investment. Chinese Life has tried to improve its quality of service by establishing customer 10service centers in its 3,400 branches nationwide. PICC has set up a 24 hour national servicehotline to serve its insurance customers. (d) China has also initiated training and other kinds of support for China's insurance companies. CIRC has conducted various classes for senior managers of Chinese insurance companies to help them be better able to manage in the coming more competitive environment. CIRC has approved Chinese insurance companies to invest a portion of their insurance premium proceeds into Chinese stock-based funds, up to 10-15% for certain insurers in the year 2008. These and other steps should help prepare Chinese insurance companies to be more efficient and responsive to customer needs. These steps combined with the expansion in the number of and kind of Chinese insurance companies, should permit China to better compete in the post-WTO Chinese insurance market.

China's insurance industry has made rapid advances over the last 20 years, and particularly since the 1992 opening of the market to FDI. China has developed a good start from almost no insurance services. It has been aided by FDI, both in terms of industry expertise and modestly in terms of foreign capital. Now, as a result of WTO negotiations, China has agreed to more completely open its financial services market, including insurance. And as with the development of the insurance industry until now, the future changes will be gradual and incremental, even after the five years of the WTO agreement transition period. The WTO accession has stimulated much additional Chinese reform activity to prepare China's domestic insurance market has vastly increased foreign participation and competition. Even with WTO agreements, however, the Chinese government will continue to have sufficient regulatory powers to assure at least minimum protection for China's still fledgling insurance industry. With much continued effort at reform including foreign participation, China will successfully prepare itself both to meet increased domestic market demands and the intensified competition of foreign insurers. The Chinese insurance market will continue to grow, though at a manageable pace, and it will be shared by both Chinese and foreign insurers. Marketing of Insurance in China In contrast to China's nascent retail-banking industry, the life insurance and savings business is already huge and increasingly competitive. Over the past decade, it has increased by about 30 percent each year, making China the world's fastest-growing major life insurance market. Rapid growth is expected through 2011, when it will have exceeded $100 billion in premiums, surpassing France and Germany. Behind the growth lies a 40 percent household-savings rate, coupled with limited and deteriorating public-pension and health schemes that have generated high demand for personalretirement savings and protection vehicles. Attractive options are limited. Capital controls block the ability to invest in other countries, and there are few good local stocks or mutual funds. Bank deposits yield a flat 2 percentno match for a typical savings policy, which pays a guaranteed 2 percent, plus 70 percent on returns that exceed the guaranteed portion, and is tax-exempt to boot. During the late 1990s, foreign insurers were invited to invest in Chinese ones, subject to a 25 percent foreign-ownership limit, or to form 50-50 joint ventures with local partners. Yet today more than 90 percent of the market remains in the hands of three domestic insurers: China Life Insurance, Ping An Insurance, and China Pacific Life Insurance. Joint ventures in life insurance can sell local-currency products, though only to people in China's coastal cities. More than 20 leading global insurers have taken advantage of this opportunity, but so far their joint ventures command less than 2 percent of the national market. Nonetheless, a look at the major coastal citiesBeijing, Dalian, Guangzhou, Shanghai, Shenzhen, Suzhou, and Tianjinreveals quite a different picture: a few joint ventures there have in short order built market shares of 5 to 10 percent. The threat to incumbents is great, as these cities account for 65 percent of all affluent and "mass-affluent" households and for a third of the

total life insurance market. Most of the growth in the industry's profits will probably come from this area. Several factors are likely to pose a direct challenge to the three dominant insurers. The productivity of their huge sales forces (China Life has 650,000 agents) is on average one-fourth that of leading players in Hong Kongand deteriorating. Annual churn rates for agents often exceed 50 percent, compared with 20 percent in developed markets. Many agents give customers poor service and misleading information. To top it all off, at the end of this year the limits on the places where joint ventures can operate will be lifted, giving foreign insurers access to the remaining two-thirds of the Chinese life market. In this new environment, domestic incumbents will probably be absorbed in fixing their internal problems. Foreign insurers with strong brands, more professional agents, and better service will be in an excellent position to increase their share of the affluent and mass-affluent markets. But time is running short for foreign insurers considering a move into China. To succeed in an increasingly crowded and competitive market, they will need superior skills or the ability to apply a targeted or innovative approach to the well-tested models used by the early entrants. Most of the 20 or so leading global insurers in Chinaincluding Aegon, ING, MetLife, and Standard Life Assurancehave formed joint ventures with domestic institutions and built new forces of underwriters and sales agents from the ground up. Compared with buying into existing Chinese insurers, joint ventures give the foreign players more control over the sales channel and the freedom to combine their own skills with their Chinese partners' understanding of the local market. There are also no legacy issues, such as an unproductive sales force or a book of negative-spread policies. Joint ventures also have a downside, of course. The struggle for market share is already fierce in the big coastal cities. It takes time to build an agency force from scratch. Attractive Chinese partners are in short supply, as are good sales agents. We therefore believe that it is already too late for newcomers to adopt the joint-venture strategy unless they have superior execution skills in, say, recruiting and training. Companies that do will not only have greater appeal for their prospective Chinese partners but could also make up for their late arrival by quickly training agents who would be more productive and more likely to stay than those employed by their competitors. An alternative for a foreign insurer would be to differentiate itself from the established competition by forming a joint venture to build a smaller and more targeted sales channel. There may, for example, be an opportunity to set up a force of financial advisers to serve the most affluent customers. Even under current regulations, these advisers could offer a bigger basket of products than is available in China today, including term life, whole life, savings policies, unitlinked annuities, and variable or fixed annuities. They could also recommend products that suited the real needs of their customers rather than just pushing their own company's products. Transforming a sales force of several hundred thousand agents is just as hard as building one from scratch. For a foreign insurance company in China, the other possible strategy, used so far by only a few, is to buy into a Chinese financial institution and then to support the transformation of its sales force. Emerging national insurance companies such as New China Life Insurance and

Taikang Life Insurance, for example, have opened their doors to the Swiss insurers Zurich Financial Services and Winterthur, respectively. Chinese insurers recognize that foreign ones can bring unique skills, in sales management, underwriting, and operations, that will help them improve the quality of their distribution systemsa prerequisite for selling more sophisticated products to the affluent. To the foreign investor, this strategy offers a shortcut to reaching national coverage and a chance to test the waters, with the possibility of increasing the stake beyond the current 25 percent limit if and when regulation allows. The downside, compared with a joint venture, is that this approach probably requires a larger capital investment and offers less control. And transforming a sales force of perhaps several hundred thousand agents is every bit as daunting as building one from scratch, city by city. The Belgian-Dutch insurer Fortis, the number-one bancassurance4 player in the Benelux countries and Spain, applied its own version of the minority-shareholding strategy when it acquired a quarter of Taiping Life Insurance, a new national insurer, in 2001. Despite the lack of full control, Fortis exerts considerable management influence over Taiping. Three top executives who were seconded to the company steered it toward bancassurance, which reduced its dependency on sales agents as the main channel. By 2003, roughly 70 percent of the company's business came from agreements with Chinese banks to sell Taiping insurance policies, and Taiping held a 22 percent share of the bancassurance market in Shanghai. But the current Chinese bancassurance model may not be sustainable in the long term, for it is driven by aggressive sales of simple single-premium products whose economics will probably become less attractive for insurers once banks start to rationalize the economics from their own perspective. To succeed in the long term, insurers and banks will have to forge closer ties that would make bancassurance relationships mutually attractive. In more mature markets, such as Europe, success calls for close cooperation between the two parties: insurers deliver products and sales support streamlined to the specific needs of banks in hopes of capturing the full potential of savings and protection products for their clients. Given the problems of transforming a huge national sales force, a newcomer that buys into a Chinese insurer and uses traditional agents to sell products will need a creative business model. One option could be to segment a sales force into two or three tiers and to focus on the top one, which would operate in lucrative coastal urban markets. In extreme cases, separate sales forces could be set up, with different brand names and their own management, to make it easier to differentiate recruiting, training, and compensation systems without sinking the morale of the low-end agents. Despite the challenges, opportunities still abound for foreign insurers in China. But a me-too strategy won't get a company very far. Creative modifications to existing strategies will be required to carve out a piece of what will soon rank among the world's most important markets for life insurance. An Example of China Life Insurance Company

The China Life Insurance Company Limited, in short China Life, is a Beijing-based Chinaincorporated company that provides life insurance and annuity products. It is a public company that was started in 1996. China Life has over 70,000 employees and is listed on the New York and Hong Kong stock exchanges. The Mission of the company is to work for the well-being of the people and revitalize national life insurance industry. Company History: China Life Insurance Company Limited is the largest life insurer in the People's Republic of China. The company offers individual life insurance, group life, accident insurance, and health insurance policies. China Life commands 45 percent of that market, and holds the number one position in 29 of the country's 31 major markets--only Shanghai and Beijing, where the company nonetheless is number two, escape its dominance. Formed from the breakup of former government-owned monopoly People's Insurance Company of China, China Life is the only life insurance company in China with a national operating license, which has permitted it to develop a network of more than 8,000 field offices, 4,800 branch offices, 3,000 customer service offices, and 87,000 sales outlets in such locations as banks, post offices, hotels, airports, travel agents, and the like. The company's nearly 77,000 employees are complemented by a network of 650,000 exclusive independent sales agents. The company also operates a "one-stop" 24-hour telephone sales and service hotline. Together, China Life serves more than 100 million long-term policy holders and more than 150 million short-term policy holders, generating nearly CNY 51 billion ($6.2 billion) in net premiums and policy fees in 2008. The group's total sales topped $9.5 billion that year. China Life listed on the Hong Kong Stock Exchange and the New York Stock Exchange at the end of 2003, raising $3.5 billion in that year's largest initial public offering (IPO). China has indicated its intention to expand into other financial areas, such as asset management, brokering, and banking. Public Company for the New Century The Chinese government began a wider opening of the country's insurance market in the early 1990s. By the end of the decade, the government had granted licenses to a total of 16 companies-including such returning groups as Tai Ping Insurance Company and China Insurance Company. The increasingly competitive environment led to a need to change PICC's structure. In 1996, the company reorganized as a holding company, called PICC Group. Its operations were then broken up into three subsidiaries, PICC Life, PICC Property, and PICC Reinsurance. PICC Group initially operated under the control of the People's Bank of China. Despite the restructuring, PICC Group was somewhat hampered in its growth. The arrival of AIG had introduced a new tied-agency system into the market, encouraging the development of branch networks. Yet PICC Group, as a state-owned enterprise, was initially barred from developing its own network of branch offices and tied agents. As a result, the company was forced to cede the leadership spot in two of the country's most important markets, Beijing, captured by Ping An, and Shanghai, taken by China Pacific.

In 1998, the Chinese government transferred oversight of the country's growing insurance market to a new body, the China Insurance Regulatory Commission (CIRC). Under new rules, insurance companies were prohibited from operating in both the non-life and life insurance markets. As a result, PICC Group was broken up into its four primary components: PICC, which took over the company's general insurance business; China Re, for its reinsurance operations; China Insurance, which handled the group's international activities; and China Life. All four companies remained controlled by the Chinese state. Yet the former members of PICC Group began moving toward an opening of its share capital at the beginning of the 2000s. In 2000, China Life announced its intention to diversify its own shareholding in advance of a future public offering. In the meantime, the company continued to build up its business across China, solidifying its dominant position in 29 of the country's 30 major markets. China Life also was helped by the government's rule for foreign corporations operating in China, which stipulated that all employees in these companies must be covered by unified insurance policies. In response, China Life concentrated its unified insurance operations at its Guangdong Branch, close to the rapidly expanding free-trade zone, in which the majority of foreign enterprises had set up their Chinese operations. By 2001, China Life had captured 80 percent of the unified insurance business for the top 500 foreign firms operating in China. China Life then began petitioning the CIRC for authorization to go public, which was granted in June 2003. As part of the run up to the company's IPO, China Life restructured its operations, splitting into three entities: China Life Insurance Company and China Life Asset Management Company, both of which were placed under a new holding company, China Life Insurance Corporation. In order to make its IPO more attractive, the parent holding transferred only long- and mediumterm policies issued on or after June 10, 1999, to China Life. This move was made in order to avoid launching China Life with the burden of a large number of loss-making policies issued at return rates as high as 6.5 percent. The June 10, 1999 date corresponded to an emergency ruling by the CIRC, which lowered return rates to just 2.5 percent. To attract as wide a pool of investors as possible, China Life launched its IPO on both the Hong Kong Stock Exchange and the New York Stock Exchange in December 2003. The IPO was a huge success, raising $3.5 billion and becoming the world's largest for that year. The retail offer had been oversubscribed by 172 times, and the total order had reached $80 billion. The success of its IPO encouraged China Life to begin eyeing expansion into new markets in 2008. China Life's unlisted parent company announced its intention to diversify its insurance business to include property insurance and develop an insurance intermediary agent business as well as add other financial services. China Life itself announced its intention to diversify into new services, such as asset management, brokerage services, and banking in the near future. In the meantime, China Life had emerged as the dominant player in what many expected to become the world's fastest-growing and largest life insurance market. The Principal Competitors of China Life are Ping An Insurance Company Ltd.; China Pacific

Insurance Company Ltd.; AIG; AIU Insurance Co.; Allianz Dazhong Life Insurance Company Ltd.; Chubb Group of Insurance Cos.; Cigna Corporation; and Manulife-Sinochem Life Insurance Company Ltd. Mutual Fund Industry in China Individual investors have been majority of mutual fund investors in most developed countries. The same trend is seen in China. Segmentation of individual investors is footstone of fund marketing research. Individual investors, which have been an important part of open-ended mutual fund holders in European countries and U.S., are also increasing their market share in Chinese market. The primary reason that investors attach much importance to open ended funds lies in the unique redemption system, which has made management of mutual funds increasingly competitive. A mutual fund management company will be forced to drop out of the market unless it provides its investors with good returns, satisfactory services and enough information to retain them. Therefore, open-ended funds present more requirements to those fund management companies. In a sense, they have opened not only the size and duration of funds but also management companies. An excellent company cannot keep a long foothold in the market without the ability of communication, service and investment. The trend that funds promotion is moving towards service industry causes marketing theories, investor segmentation in particular, to be salient in funds sales. While individual investors have not became a main component in Chinese fund market yet, their significance could not be ignored. Since 1992, the scale of Chinese stock market increasingly expanded, and the main reason why stock indexes moved up was that the increasing number of individual investors resulted in endless source of new funds. Hence, it doesnt mean that there is no need to develop the individual investors while developing the institutional investors. However, most existing knowledge about open-ended mutual fund holders is for institutional investors and little is known on individual investors. Compared to institutional investors, individual investors have completely different investment attitude and behaviors and hence these differences lead to diverse marketing strategies. These are indications that open-ended mutual funds have commonly used financing tools or financial products fitting for small and middle investors. Consequently, when individual investors increasingly play a crucial role in mutual funds industry around the world, also, it is rapid growth in China. Investment funds in China started with closed-ended forms and now are moving towards openended ones, which is the generally adapted form in the global market now. The existing closeended funds will be either liquidated or changed to open ended funds in a few years. It can be predicted that investment funds in China will become pure open-ended funds sometime in the future. Fund profession has entered the age of open ended funds ever since Huaan Fund Management Company launched the first open-ended funds in September 2001. Moreover, the funds management industries of the two sides across strait both have quite sizable development. In February 2007, the Chinese mutual fund investment cost amounts to $110

billion USD financial assets of investment. The emergence of the growth is primarily based on two reasons:First, the orientation of investment major shifted from the money market fund (invested in shortterm bonds) to stock products. Second, China's stock market had dramatically soared in 2006 (reached the historical peak from 1949), and value of stock-related assets relatively rose. Assets value under fund management system in Chinese are equivalent to 8% of the value of GDP of mainland China in 2006, that is, 214% of United States, 24% of Taiwan, and 7% of India. There is still considerable room for growth. Now, more and more fund managers have oriented their target market to individual investors and started to attach importance to explore and market non-institutional investor. By professionals estimate, the institution holds more than 50.45% fund share but currently most of Chinese funds are invested by institutional investors, and the percentage reaches as high as 90% in some funds, while the percentage of individual investors is only near 10% This is because the stock market of mainland China encountered the best bull market ever in the history of the past 50 years. Thus, in recent years, people eagerly invested in stock market in the form of funds. Yet, with more and more foreign capitals entering China, with Chinas commitment to release control of foreign capital after joining WTO, and with gradual development of investment fund market, it can be estimated that China is bound to follow the international trend and individual investors will finally become mainstream investors. In a word, marketing programs carried out to individual investors will be a very important means to market open ended funds in China sooner or later. Research on and classification of individuals characteristics will be the basis for marketing programs, thus gaining an increasing concern. The Chinese fund management industry assets will exceed $1.4 trillion in 2016, and it is the world's fastest-growing country. Meanwhile, Chinese investors are no longer satisfied with traditional, low-interest bank savings, preferring to seek investment channels with a high rate of return which greatly promoted economic development. In general, although flourishing growth has been witnessed in China, fund industry still has many challenges. There are problems in China such as strong political orientation, fewer investment directions, higher fees and government supervision divergence, which directly lead to quite poor fund earnings. Limited supply from Chinese fund market and failure to establish an effective system to restrict and eliminate fund managers are also reasons for poor earnings. The issuance of funds requires approval of supervising institution. Fund managers generally aim at maximizing the asset possibly raised. Also, fund managers depend on institutional investors too much with little concern about individual investors. Besides, funds are homogeneous. Although there are stocks, bonds, money, and hybrid, they are similar to one another in terms of investment objects, standard of rates, and the expected profits. In addition, the specific fund names in Chinese (e.g. Selected Fund, Excellent Fund, Fastgrowing Fund, and Profitable Fund) are rather confusing to investors. Some people believe that

the reasons for homogeneity are on the one hand limited channels of investment and on the other hand regulations made by supervisors. No matter what the reasons are, it is true that investor segments have not been done in the process of funds designing. All the time, every fund management company has been orienting their major target market of open ended funds to institutional customers. But since institutional funds are intermittent to a great extent, they are in need of redemption at the year-end. In addition, institutional investors have excellent bargaining ability, so they have obtained far more preferential conditions than common investors in subscription. People in practical business all know that many funds, besides completely free in-and-out fees, would also provide 1% discount for institutional investors. The highest discount having ever appeared was up to 3%, then, deducting tax and other expenses, institutional investors could get a rate of return at 1.2% by calling funds immediately after the closing period. All these have fostered opportunistic action of institutional investors, resulting in vast amounts of funds redemption occurrence from time to time . Segmentation of Mutual Fund Investors Segmentation is the basis for successful marketing in terms of marketing principles and programs. Based on the result of segmentation, the marketing mix could then be conducted. Since the importance of individual investors has been emphasized, more and more companies attempt to solve marketing problems by establishing their own marketing research department or with the help of outside marketing consulting services. Statistic information and studies about individual investors characteristics, such as age, marriage, level of education, income, asset portfolio and purchase channels are regularly released by Investment Company Institute (ICI). Moreover, investors channel preferences, switching behaviors, customer relationship management, channel design and advertising strategy are hot topics that are getting emphasized. Behavioral finance and psychology have been integrated into the studies, those on investors in particular. In this sense, the demographic characteristics of mutual fund individual investors in China are as follows: The leading decision-maker of family investment, age ranged from 25 to 50, and owned housing. Own at least 50,000 RMB stocks, bonds or real estate investment. Annual household income was more than 50,000 RMB, or household yearly income was ranked approximately in top 20% in urban areas. Not the employees of banking, securities, insurance, investment industry, advertising, market research, and consulting firm. Not expatriates of offshore company. Knowledge of Investment Knowledge of investment is consisting of knowledge of risk and financial literacy. Knowledge of risk exerts influences on investors choice of channels. However, there are some people who do not believe they will lose money when investing money on funds. Numerous people have heard of funds, however, a majority of them poorly knew the mutual funds. Even so the mutual

fund gives the impression of many advantages, and allows non-professionals to be involved in investment with the relatively low risk, thus realizing capital gains Financial Maturity The concept of financial maturity means that the consumption of financial services is moving from services of high solvency and low risks to those of more complexity and low solvency. Investors prefer the products of low complexity and risks before they adopt complex ones. All the financial products are classified into four categories: (1) basic products, (2) risk management and cash reserve products, (3) growing products to make up inflations, and (4) risky tax deductible asset. The investors who adopt the first two categories stay at a low level and those who have the last two remain at a high level. Psychological/Behavioral Variables Since the late 1980s behavioral finance theories have been popular in the U.S. The newly developed theories, a combination of economics, finance and psychology, appeared due to the fact that the existing financial theories fail to explain what is going on in reality. Contrary to traditional portfolio theories, behavioral finance theories describe true behaviors of investors and analyze the effects of cognition, affection and attitudes on personal information processing process and decision-making profiles. Unlike risk perception, which measures emotions and attitudes, risk profiles examine how investors respond in a particular context. Three questions test risk profiles -- market response, reinvestment and market expectation. The mutual fund management in China is formulating its own unique models of product design and development, marketing as well as trade supervision. Looking back the history of researches on individual investors, demographic variables are usually used, at the same time, by means of discriminate analysis and cluster analysis, to find out marketing characteristics of different market segments such as characteristics concerning choice of channels, response to advertisements, and choice of different types of funds, etc. Recently, numerous variables such as attitude variables are getting emphasis. This trend means that segmentation based on behavioral characteristics, due to the difficult assessment, is important but still in quite a vague period. Since drastic changes in business environment drove enterprises to adjust quickly and properly, the prevailing individual investors behaviors was not sufficient to handle drastic environment changes. Now it is necessary to find out meaningful attitude and behavior variables since segmentation based on behavioral characteristics is directly linked to purchase behaviors.

Marketing of Mutual Funds in China

China is opening its notoriously closed mutual fund industry to international investing, injecting more than 1 billion potential investors into the global markets. Meanwhile Western fund

managers and technology providers hope to provide much-needed expertise to Chinese investment firms. Almost everything about China is big -- its geography, its population, its manufacturing capacity. Almost everything except its financial services sector, that is. But that is beginning to change. China's mutual fund industry is currently one-tenth of the size of the U.S. market, but it is expected to grow drastically as China opens its doors to international trading. And if the Chinese middle class continues to expand and increasingly invest in mutual funds, the local market has the potential to become one of the largest in the world and could provide a huge pool of investors to the international markets. Like other countries around the world, China's economy has been hard-hit by the global financial crisis -- assets under management at mutual fund companies in China shrank from US$457 billion in 2007 to US$275 billion by the end of 2008, according to Zhou Hua, president of SunGard China. By comparison, in the U.S. the mutual fund industry's assets stood at $9.6 trillion at the end of 2008, down from $12.04 trillion the previous year, according to the Investment Company Institute. But due to new regulations allowing Chinese companies to trade internationally and the fast development of innovative investment vehicles such as pensions and separately managed accounts, Zhou Hua says, China's mutual fund industry could surpass US$1.5 trillion by 2012. The country's gradual transformation into a global financial player is already creating a wealth of opportunity for Western financial firms and technology providers. Since Chinese firms are relatively new to the game, they must rely on the expertise and technology of their Western counterparts to become a real force in the international markets. Raising Foreign Investing Concerns over risk exposure first led Chinese regulators to introduce in 2006 the Qualified Domestic Institutional Investor regulation, better known as QDII, and open the country's notoriously tightly controlled securities markets to international investing. At that time the government decided -- following the "Don't put all of your eggs in one basket" investment mantra -- to try to diversify the portfolios of Chinese investors by allowing Chinese financial institutions to invest in foreign markets. Using Open Economy to Reduce Financial System Costs Discover an open economy solution with implementation roadmap that breaks the cycle of rising IT maintenance costs. Until 2006 the Chinese could only invest in domestic stocks and bonds or sit on their cash. Then in 2007 retail investors were given access to offshore investments via mutual funds. Through international investing the Chinese can have access to all kinds of alternative investments. Under QDII firms initially were permitted to invest only in fixed income and money markets. But the plan was eventually broadened to allow firms to invest in other products too. Then, in 2008, China and the U.S. agreed to allow Chinese citizens to invest in the U.S. stock market through mutual fund organizations or other asset fund companies in China. For the first time, some 1.3 billion Chinese were allowed to invest in the U.S. stock market.

The time the QDII regulations were put in place was the time of the Chinese equities bubble. There was a rise in equities values that was very rapid, and the government thought it looked like a bubble. It was a bit speculative; there was a lot of excitement from investors. So, regulators wanted to open up the market to different types of investment, to asset diversification. Indeed, foreshadowing what was about to occur in the global markets, the Chinese equities market did crash, losing nearly half of its value in 2007 and 2008. The Chinese government was right. Individual investors are very interested in exposure to other markets, and financial institutions know the products are available in the most developed markets -- the Western markets. A Nation of Savers One of the reasons behind the Chinese people's strong desire to invest is a cultural emphasis on the elderly and preparing for the future. Like other Asian countries, China has a very high savings rate. But without corporate-sponsored retirement plans, like in the United States, or substantial help from the government, the Chinese must take complete charge of their own savings and retirement planning. And they do a good job of this. According to a report in China Daily, the largest English-language newspaper in China, economists estimate that the average Chinese citizen saves between 30 and 40 percent of his disposable income -- a rate that is at least twice as high as in the U.S. Chinese individual bank savings had exceeded 20 trillion yuan (nearly US$3 trillion), while loans, including those for cars and housing, added up to just 3.7 trillion yuan by the end of September 2008. This indicates the debt level of Chinese households is quite low and such balance sheets are very healthy compared with those for U.S. and European households, making it possible to create room for development. Until recently the Chinese public put its money in low-yielding bank investments. But as the population becomes increasingly affluent, the Chinese market is demanding new investment vehicles. Further, the Chinese government, aware that it can't meet the demands of its aging population on its own, is encouraging private investing through pensions and mutual funds while also encouraging investors to seek higher potential returns. Today the Chinese mutual fund market -- which emerged eight to nine years ago -- remains underdeveloped, but it is rapidly growing. There are currently 63 fund management firms in China, half of which are joint ventures with foreign firms. These joint ventures include Morgan Stanley Huaxin Fund Management Co., SYWG BNP Paribas Asset Management Co. and ICBC Credit Suisse Asset Management Co. People in China are very eager to invest their money. The GDP has grown very quickly in China. People are more wealthy. They have more money to invest. And after several years people know they must have their assets managed by experts, which means they can earn a long-term stable return. Technology Expertise

Despite the Chinese regulators' gesture toward the West, however, firms in China still have a number of challenges they must overcome in order to trade on a level playing field internationally. The move from local to international investment is a big change, not only for the front end but also for compliance, risk and the back office. Gain a complete and consistent view of all key profitability drivers In their relatively short history, Chinese mutual funds have been focused primarily on domestic equity markets, and as such have not been exposed to -- nor needed -- sophisticated order routing or execution management technologies. The local market structure is fairly simple. Execution is handled through a simplistic local version of DMA [direct market access], and system requirements have been addressed by a small number of domestic vendors. For their QDII business, Chinese asset management companies tend to run simple order management systems without portfolio management capability from international providers. In terms of domestic trading, local system providers have more-tailor-made solutions but increasingly those systems cannot keep up with continuous innovation, so many asset managers are eagerly looking for new solutions. Systems provided by local vendors that support the trading of domestic stocks tend to fall apart when companies want to use their QDII licenses to trade internationally. On the plus side, electronic trading is already widely used by Chinese mutual funds for the domestic market, which will ease the transition to global trading. For trade settlement and portfolio management, Bosera uses automatic order placement and receives trade confirmation and place instructions electronically. . Making the Global Connection But while Chinese firms may be comfortable with electronic trading, they lack connectivity to international exchanges, and Chinese mutual funds don't use FIX or any other international messaging standards. Order management trading in China is very different -- all orders go direct to the exchange and don't use the FIX Protocol. They use their own protocol. Currently Chinese firms generally rely on local vendors to support domestic trading. Front-office technology is widely provided by Hundsun, a local vendor that has an 85 percent market share in China. Now that investment firms are going to set up operations outside China, they are looking to outside vendors. Outside China, firms will have to deal with trading with brokers, ECNs, ATSs, dark pools and algorithms. None of these things exist in China. Only Western vendors -including Charles River, Fidessa, Bloomberg and Linedata, which have approval to set up operations in China -- have the expertise to provide this kind of connectivity. While Bosera uses Hundsun for compliance, it has developed its own portfolio management systems for the front office, as well as for performance measurement and evaluation. And to trade internationally, Bosera has turned to Bloomberg for market data and portfolio management. The company also uses MSCI Barra for risk management and performance measurement products and Eagle Investment Systems to support global investing and integrate domestic and global investing. Bosera also is examining how to expand and modernize its data center to support global investing. We are also thinking about a service-oriented architecture system to support our applications. Like Bosera, other Chinese mutual fund industry leaders already are engaged in

talks with Western experts about their evolving technology needs, according to vendor executives. To prepare themselves for entry into the global market, China's mutual funds are quickly learning about the technologies available, as well as the business processes and workflows of international trading and how they differ from existing processes within China's domestic market. The biggest challenge that Chinese companies that want to trade internationally face is understanding data management, risk, client reporting and accounting -- rather than the front office. Accounting, for example, poses its own particular problems. In China they have single-currency accounting based on the Renminbi, or RMB, Kanter says. China-based solution providers, such as Yestech, whose Golden Finger solution is widely used by domestic industry, currently does not support multicurrency accounting. While Bosera's Wang acknowledges that the firm still uses the Golden Finger technology for accounting, he says Bosera is in talks with international vendors. But the fund management company also is talking to Yestech about expanding its solution's capabilities to support international investing. Here in China, a lot of things are different. So we are considering how to implement products and how to expand the development of products in China. Think Locally, Act Locally Given the unique structure of the Chinese securities market and the local cultural differences, Western technology vendors that want to work with Chinese financial firms face their own set of challenges, not the least of which is adapting their solutions to the specific technology needs of the Chinese industry. Many Chinese firms, for instance, expect a high degree of customization for their workflow processes and details of transactions. Issues revolve around demands for customization, and the difficulty in communicating requirements to vendors and vendors responding. That puts a dampener on new deals for new solutions. Some firms do say they will go with domestic vendors, or go in-house if they are very big. Chinese technology is usually a tailor-made, all-in-one solution for domestic investment, confirms SunGard's Zhou Hua. Functionalities such as portfolio management, order management and execution management cannot be separated from each other. Usually U.S. technology has modular components for these different functions. Cost is also a barrier for Chinese firms in adopting foreign-based vendors' technology. Bosera's Wang points out that solutions from international vendors are currently much more expensive than local vendors' offerings. They are two to three times more expensive than Chinese vendors. Further, in many cases going global isn't just about technology -- it also means a company has to transform its business processes. For instance, many firms in China have outsourced their accounting to a custodian. As they participate in QDII, they may want custodians to handle some of their accounting. But for the funds they manage directly, they may already have the accounting in-house," he says. "So they have to blend their existing accounting processes with new ones."

Gearing up for international trading also is about building a workforce with the necessary skills. Most of the funds in China have hired fund managers/assistants and analysts who had three to five years' experience in international markets. But investment is team work -- you need support from the research, compliance, risk and back offices. So they have been eagerly learning all these aspects. But if they plan to expand their market coverage, there will be a long way to go. Recently laid-off Wall Street workers may be able to tap into these new employment opportunities -- if they are willing to move to China. Some of China's largest financial institutions recently attended a recruiting event in Queens, N.Y., to recruit talent from abroad. Still, language does pose a barrier, since business at Chinese fund management companies is conducted largely in Mandarin. If former Wall Street executives are Chinese, they're offered jobs in China, but not Americans -you need to be fluent in Mandarin. If you're a mutual fund trader dealing with clients in China, Mandarin is the language, not English. But, like in other countries around the world, language and geographic barriers could eventually fall in China, truly transforming its industry into a global one and also opening it up to international talent. Meanwhile dozens of firms have already been licensed to invest outside China, including China's leading asset managers and joint-venture mutual fund companies. They all are at various stages of research, negotiations and implementations of systems, and have already made substantial strides in developing expertise, systems and processes to prepare themselves for a much higher level of international trading activity than exists in China today. In the short term, however, Chinese regulators have been slow to green-light more firms to invest internationally. There has also been a preference among investors in China for the domestic market, as it's what they know and has been outperforming every other market, so there has been little incentive for them to go elsewhere. But in the long term, there's a broad consensus that growth is enormous and there's huge potential. The 10 Chinese mutual funds currently approved for international trading all likely will be ready to hit the global markets in early 2011. There can be no doubt that China's fund managers will be taking their place among the ranks of the global leaders in the not-too-distant future.

KEY POINTS China's financial system is highly regulated and relatively underdeveloped, but has recently begun to expand rapidly. Financial services in the People's Republic of China refers to the services provided by the finance industry: banks, investment banks, insurance companies, credit card companies, consumer finance companies, government sponsored enterprises, and stock brokerages.

China's banking system is highly regulated with six major banks, each having specific tasks and duties. Chinese banks still face significant rules and regulations, as well as a degree of suspicion and protectionism as they move to expand abroad. The Agricultural Bank of China is the first commercial bank established in the People's Republic of China in 1951. Chinese banks, which make little attempt to target particular customer segments, will have to become far more savvy or risk losing their local dominance in the event of foreign banks entering China. The insurance industry plays a number of important roles in China's modern economy and provides crucial financial intermediary services, transferring funds from the insured to capital investment, a critical need for China's continued economic expansion. Foreign insurance companies have been invited by the Chinese government to play an increasingly important, though carefully restricted, role in China's economic modernization. Despite the challenges and restrictions, opportunities still abound for foreign insurers in China. China Life Insurance Company Limited is the largest life insurer in the People's Republic of China which offers individual life insurance, group life, accident insurance, and health insurance policies. Individual investors have been majority of mutual fund investors in most developed countries and the same trend is seen in China. Investment funds in China started with closed-ended forms and now are moving towards openended ones, which is the generally adapted form in the global market now. China's mutual fund industry is currently one-tenth of the size of the U.S. market, but it is expected to grow drastically as China opens its doors to international trading. Chinese investors are no longer satisfied with traditional, low-interest bank savings, preferring to seek investment channels with a high rate of return like equity linked mutual funds.

QUESTIONS Q1. What are the features of the financial system in China? Q2. Explain the history of banking in China.

Q3. How is marketing of banks done in China? Give an example Q4. Why are banks in China adopting a customer-centric focus? Q5. What are the features if Chinas insurance industry? Q6. Explain the marketing of insurance in China. Give an example. Q7. Explain the mutual fund industry in China Q8. What are the practices used in the marketing of mutual funds in China?