Insurance exec: China offers lessons in globalization for U.S. and world

March 12, 2007

I am not going to talk about regulation, not yet. I will soon but it will not be today — real soon. I cannot wait.”

Thus Maurice “Hank” Greenberg — target of Eliot Spitzer, prosecutors, competitors and rumor mills — let it be known he would avoid controversy on a recent winter day when he addressed the Association of Professional Insurance Women and the Chartered Property Casualty Society in New York.

Instead of diving into domestic politics, the former American International Group discussed international affairs, offering a rationale for globalization and an education on China, where the insurance firm he now heads, C.V. Starr & Co., was founded in 1919 and where he himself first visited in 1975, at the tail end of the Cultural Revolution.

“It was not a very pleasant place for me, a very primitive place. The Cultural Revolution took some of the most important and the most affluent people and put them in farms, pig farms or whatever,” recalls Greenberg.

He went to China in 1975 because there was a historic connection between his company and the people of China and because he saw opportunity. He has since developed close personal and business relations with the Chinese.

“I believe that 1.3 billion people could not be outlawed out of the world system forever. It would change; China was too important, too populous a country to develop outside the world trading system. Of course that turned out to be true. From 1975 to the time they have entered into the world trade system was years, a couple of decades actually.”

Greenberg said he helped China obtain membership in the World Trade Organization “because that was good for the people and good for the world.”

That, he said, has turned out to be true and China is rocketing to economic stardom.

“Never in the history of the world has so much been done in one country in such a brief period of time,” the veteran insurance industry leader observed.

He told of visiting an area just across the river from Shanghai, which was simply a rice field when he first went to China, but which is today one of the world’s most modern cities.

In 2008 the Chinese will be hosting the Olympics, which Greenberg predicts will further accelerate what is already a quick pace of change in China. “China is now preparing for the Olympics and you will see a dramatic change in Beijing where it will take place,” he said.

To illustrate the progress, he noted that China Life, which is the largest life company in China and state owned, had a public offering in the Shanghai market. After the stock closed, China Life was the third largest insurance company in market capitalization in the world. “Now think about that. Who would have believed this just a decade ago and now it has happened.”

Similarly, ICBC, which is the largest bank in China, also owned by the government, had a public offering in Hong Kong. It is now the third largest bank in the world, just behind Citigroup and Bank of America.

While critics of globalization maintain that it causes the U.S. to lose textile and other jobs to other countries like China and India where production costs are low, Greenberg prefers to see the positive.

“We buy products that people could not afford to have; they weren’t getting them very inexpensively. So it helps the middle class and the lower income class of the United States. At the same time, the trade surplus, they buy up U.S. dollars and they buy Treasury bonds, and that keeps inflation down in our country. That is part of what globalization is all about. They benefit from their exports, we benefit from their products and, of course, they buy bonds and therefore it keeps inflation down, interest rates don’t go up.”

He predicted that in time, China’s current trade surplus with the U.S. will moderate, as its own consumer class grows (per capita income is only $1,700 today) and its people buy more products produced in China.

“We want to see less of a trade deficit. China should do more to stimulate their consumer market so they sell more goods within China. China will do that in time. They cannot do that initially when they have $1,700 of per capita income. There is not much to stimulate in those areas in China where wages are very low. It will take time. There are 900 million people in that category.”

Raising per capita income is just one of the challenges facing China today, Greenberg acknowledged. After the government got out of many industries, the pension and healthcare systems all but collapsed. Perhaps the biggest problem is the pollution brought about by the rapid growth of industry.

“The environmental issues in China are just staggering, and unless they deal with that, in a very, very forceful way, their healthcare costs and life span of the generation now will be harmed dramatically. The leadership knows that and are working on it.”

Solutions may be slowed by certain traditions tied to China’s 5,000-year history and the shear size of the country.

“It’s a huge country of 1.3 billion people, and the center of Beijing can only influence so much. There’s an old Chinese proverb, ‘The mountains are high and the Emperor is far.’ Essentially that simply means that the central government in Beijing cannot possibly influence day to day activity throughout the country, and so a lot of things happen around the country that are at odds with what the central government has ordered to do, which leads to lots of other issues.”

He insisted that China is determined to deal with its pension, healthcare, pollution and other problems, although doing so will take time. The government has a five-year plan in place.

The government is also attempting to deal with corruption in government. “The party secretary in Shanghai, a very popular man was arrested because there was a claim, alleged, not proven, that he used the Shanghai pension funds for personal investments. It may be true, it may not, I don’t know. But they’re going to make examples of throwing in jail popular people who get a big head, and that influences others,” he reported.

Unable to resist, Greenberg, who vowed not to discuss politics, added, “Does that sound familiar?” — which brought laughter from his New York audience.

The Chinese are cautious about inviting more foreign capital. “You look at Chinese history, it’s a 5,000-year-old country, a 5,000-year-old culture, and it’s own history. Over the centuries, the Chinese believe that foreigners have always taken advantage of China, and history would prove that that’s right, that foreigners did take advantage of China. They considered them not civilized. They’re not going to let that happen again,” he advised. “So the wealth that’s being created in China, the trillion dollars of reserves, and a lot of Chinese who’ve been educated in the United States working in investment banks and other financial institutions or technology companies or scientists, are going back to China and starting up their own businesses.

“The government’s saying, what do we need foreign capital for? We’ve got a trillion dollars mad money spending. Why don’t we have our own private equity companies? What do we need others for? We’ve been educated in the states, we went to work for Goldman Sachs or Morgan Stanley or whatever, and that’s true. So you’re going to see more Chinese companies providing their own private equity firms.”

While China may be cautious about inviting foreigners in, it will not hesitate to reach out to engage in the global economy elsewhere. The C.V. Starr executive predicted Chinese companies will begin buying up companies around the world, even setting up plants in the U.S. to manufacture lower cost automobiles.

“This is not a 10-year horizon; it’s going to happen sooner than that. You’ll be seeing a lot of Chinese and you won’t be able to compete with them,” he added.

According to Greenberg, the U.S. can’t compete as it used to do on low cost goods but it can compete by continuing to develop ideas, products and new innovations. “That’s what globalization is all about. If somebody can develop a product cheaper than you can, they should do that. Then you’ve got to continue to develop products that they can’t develop. That’s an ongoing process; it’s not just a one-time process, it’s constant,” said the insurance executive.

To continue to be the leader in innovation, he warned, the U.S. will have to invest in its educational system, because China is also gaining in intellectual capital. “We have a great talent pool in this country. We have the best universities in the world, but probably one of the worst K through 12 in the world. Unless we solve that problem, the universities are not going to have great students coming in and we’ll lose our edge in that,” Greenberg said.

“We simply have to wake up and do the things that we can do best. We have always been a great, innovative society and we must not lose that momentum. If we do, I think we’re going to find it much more difficult than we have up to date.”

For Greenberg, the global economy is not just about business; it’s about a safer world:

“The opposite of that is that you try to protect your jobs and what little you have going, and you put walls up. You become a world of regionalism rather than a globalized world. That kind of world becomes dangerous. There’s a limited amount of commodities in the ground, oil or gas that exists. We need to develop alternate sources of energy. So, if you have a regionalized world, you’re competing for the resources that everybody else needs.”

Topics USA China Pollution

Was this article valuable?

Here are more articles you may enjoy.

From This Issue

Insurance Journal

Insurance Journal Magazine