CUNA Mutual Now Doing Business in China; Says It's Targeting an Untapped Cooperative Market

MADISON, Wis. – After 15 years of preparation, CUNA Mutual is set to start officially doing business in China, one of the most dynamic and rapidly expanding markets in the world. “China is a complex market to enter, but one that has tremendous promise,” said Ralph Swoboda, SVP of CUNA Mutual’s International Division. “There are a number of major foreign insurers that have entered the Chinese market, but none are focusing on the credit cooperatives, and so far no one has introduced credit life and disability,” said Swoboda. CUNA Mutual has inked a deal with three large credit cooperatives to provide credit life and disability insurance and a basic homeowner’s policy. Initially CUNA Mutual will use a local Chinese company to be the underwriter of record, with CUNA Mutual reinsuring a major part of the risk. Swoboda said it’s a technique the company uses in international markets to test the waters without a major upfront investment. CUNA Mutual will be running things out of its office in Guangzhou. Eventually, it plans to have its headquarters in Shanghai, which is the financial hub of the country. On a parallel track to this first initiative, CUNA Mutual will be applying for a license to have a company of its own in China, which it would have operating control of, but would like to have the credit cooperatives as joint owners. The licensing process could take about a year and a half. CUNA Mutual’s equity partner in China is the International Finance Corp., which is the private sector development arm of World Bank Group. The IFC has a reputation of helping finance deals where there’s a good chance it will make money. Swoboda said China has really become two countries. The interior is still very poor, while along the coast there are very modern cities and an emerging middle class where people are buying their own homes. In terms of insurance penetration, it is very low, said Swoboda. The co-ops CUNA Mutual is targeting are located in those more sophisticated and wealthier coastal regions. Initially it will work with cooperatives in Guangshou, Beijing, Shanghai, and Guanzhou. Those four cooperative markets have some 15 million customers, making it the largest market for CUNA Mutual outside of the U.S. There are approximately 35,000 co-ops in China, commanding $205 billion in assets. China’s credit cooperatives are credit union-like, but certainly not credit unions. They are owned by their depositors, however there is no volunteer board of directors and no defined field of membership. The co-ops can serve anyone – businesses and individuals alike – who may or may not be members. Swoboda said China’s credit cooperatives are quite sophisticated. “When you walk into these branches, you know right away these are very modern financials with ATMs and computers,” said Swoboda. A Changing China China is not the communist state it once was. Over the past 20 years, the government has adopted a more capitalistic approach and has allowed the private sector to develop with help from foreign investment. China has quickly become a powerhouse in the world markets, especially after entrance into the World Trade Organization. “There’s no more communism in China. The state provides various services to the people, but it’s at various stages of becoming a privatized economy,” said Merrill Weingord, CEO of China Strategies, a consulting firm that helps companies do business in China. “What’s different in China is the state is involved on a private basis in many activities. It’s not sneaky, that’s just how it is,” said Weingrod, who just returned from Shanghai at the time of this interview. Weingrod said most Americans have no idea how exciting China is. “Shanghai is maybe the most modern city in the world. America can be seen everywhere. There are more Starbucks coffee shops there than I’ve seen anywhere. The growth rate of consumerism is incredible,” said Weingrod. With a quarter of the world’s population, Weingrod said the Chinese market is equivalent to North America, Latin America, Europe and Japan combined “After a really bad 20th century for them, we’re going to be seeing and hearing a lot about China. In 30 years they should have the second largest economy. Everything they do is about making money.” He said the biggest challenge for companies moving into the country is understanding the complex regulatory environment. There are provincial laws, state laws and local laws to consider. Swoboda said CUNA Mutual hasn’t had any major problems with the government, in fact he described the relationship as superb. On the insurance front, CUNA Mutual deals with the Chinese Insurance Regulatory Commission to ensure it is in compliance. Companies also need to understand the culture of China to succeed, said Weingrod. “The Chinese use a wonderful old saying, `you cross the river by feeling the stones’. In other words for companies that means you may go into China with a strategy, but once you’re there on the ground you’re going to have to feel your way around and adapt.” Global companies have been laying the groundwork for years to capitalize on the country’s growth. General Motors recently opened a plant in China. Kodak now sells more film there than anywhere in the world and Volkswagen sells its most cars in China. “Right now China looks like a pretty good story. The economy is growing at a pretty hefty rate. I think the market is there, the potential is there. A lot of foreign investment is going in. The government still has their hand in a lot of things, but is allowing the private sector to grow, especially along the coast,” said NAFCU economist Jeff Taylor. It’s difficult to decipher just how fast China’s economy is expanding. At press time China’s National Bureau of Statistics said the economy grew at 9.1%. That’s a torrid pace for any country, but the figure may be lower than the country’s real growth. Many financial firms in the U.S. believe growth was in the double digits, between 11 and 13%. For years economists have alleged that the Chinese government levels out its statistics to quell any concern about its economy overheating. China’s currency, the yuan, is the subject of a world political debate. The yuan is a controlled currency pegged to a particular value of the U.S. dollar. Right now it’s about 8.2 yuan for every one U.S. dollar. That makes the yuan cheap globally and Chinese products cheaper. The U.S. has been saying the yuan is too cheap and should be closer to about 6.5 for every dollar. China however has said revaluing the yuan could cause a severe destabilization. “Eventually the yuan will become a free-floating currency. They don’t have the banking skills right now to handle that,” said Weingrod. How important is China on the world scene? The Chinese government claims that China consumed 30% of the world’s coal production in 2003; 36% of steel and 55% of cement. If those numbers are even close to right, China is the world’s biggest construction site. The country is finding its greatest market to be at home as exports still significantly lag behind imports. Financially the Chinese people contrast Americans dramatically in how they handle money. Right now Chinese citizens save a staggering 33% of their income, compared to the U.S. where the savings rate is negative if home equity is not calculated into the equation. “The number one problem in China today is the disparity in wealth. The urban populations are getting richer and the country sides aren’t,” said Weingrod. Probably one of the shakiest industries in China is banking. The Chinese government is still very controlling in the banking market, which has had its share of troubles. Just recently the government had to bail out two banks as well as a brokerage firm. The country’s four biggest banks are state run. Regulation of banking is changing, Swoboda said. Last April the Chinese government transferred responsibility for banking regulation to the newly formed Chinese Banking Regulatory Commission (CBRC), and the Peoples Bank of China (the country’s central bank) group responsible for supervising the credit co-ops moved over to the new agency. Right now foreign banks are not allowed to do dollar transactions in China, but that will also change and bring another wave of growth to the country, predicted Weingrod. The move into China continues CUNA Mutual’s international expansion. About 10% of its $2.8 billion in revenue last year came from its international business. Its biggest international markets are Canada, Australia and the Caribbean region. (See chart) -