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 2008, when it will have exceeded $100 billion in premiums, surpassing France and Germany (Exhibit 1).

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 personal-retirement 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 percent—no 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...