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The U.S. House of Representative's approval of permanent normal trading privileges for China late last month places U.S. fund and insurance companies one step closer to competing in a market that could develop into one of the largest in the world, said executives and analysts in the fund and insurance industries.

The upgrade in trading privileges was crucial for U.S. financial service companies because it will allow them to compete with non-U.S. firms for China's markets that are opening to foreign firms as part of China's entrance into the World Trade Organization.

Because mutual funds are not closely tracked and are relatively new in China, it is difficult to estimate the size of the market, but bank deposits, currently the most popular form of investment, amount to $700 billion, according to Ben Phillips, a consultant with Cerulli Associates, a mutual fund research and consulting firm in Boston.

Although the fund and insurance market in China need a lot of development, they could markedly increase the value of insurance and pension premiums of U.S. providers, said Norman Sorenson, president of the international division of Principal Financial Group of Des Moines, Iowa. Sorenso spoke before a U.S. House Committee on Banking and Financial Services in favor of granting the privileges in early May.

Principal opened a representative office in Beijing in 1994 and has advised the Chinese government on the development of a pension system to support a growing number of retirees. China's worker-to-retiree ratio is expected to drop from 10 to 1 currently to 3 to 1 by 2050, according to a Cerulli study issued last year.

Although underdeveloped, China's retirement market holds enormous potential, Sorenson said. Its existing retirement plan is based on a subsistence-type social security program that is not compulsory and covers only the most basic needs for some government employees, he said. Large, state-owned enterprises do not currently offer retirement savings plans and most workers' savings are put in time deposits or "under mattresses," he said.

To address its population's growing retirement demands, the Chinese government has adopted a program that will gradually introduce a type of voluntary, employer-driven 401(k) program. Ultimately, the program will allow investors to supplement their retirement savings with annuities and life insurance investments, he said.

One of the challenges of developing China's retirement market will be the high costs of record keeping for a large number of small accounts, said Phillipsas.

Several other U.S. firms, besides Principal, are interested in the Chinese market. They include Variable Annuity Life Insurance Co. (VALIC) of Houston, Texas, American International Group of New York, Nationwide Financial of Columbus, Ohio and State Street Global Advisors of Boston, Sorenson said.

Several non-U.S. asset managers are interested in developing business in China including HSBC of London, Zurich Financial Services Group of Zurich, Switzerland and AGF Management Ltd. of Toronto.

The size and potential of China's markets as well as China's entrance into the WTO prompted AGF to open a representative office in Shanghai, according to Dannie Tong, vice president of AGF's Asian markets.

"We saw the potential of the market," he said. "With savings rates on the increase on an annual basis, we think it's appropriate timing for us."

The country's leadership has shown its desire for a liberalized financial services market, he said. The country introduced state-sponsored closed-end funds to the public in 1997. There are currently 26 funds that are offered on the country's stock market, he said.

Currently, only Chinese brokers can sell the funds, which are heavily regulated, Phillips of Cerulli said. The funds can have expense ratios of no more than about 2.5 percent.

In order to enter the Chinese market, foreign financial service firms must form partnerships, in which they have no more than a 30 percent stake, with Chinese firms, Tong said. After five years, foreign firms will be allowed to control 49 percent of the partnership, he said.