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Dawei Cheng

MACD Project
MA in Commercial Diplomacy
Monterey Institute of International Studies


Project Advisor:
Prof. Geza Feketekuty
March 29, 2000

This paper was researched and written to fulfill the M.A. project requirement for completing the Monterey Institute of International Studies’ Master of Arts in Commercial Diplomacy. It was not commissioned by any government or other organization. The views and analysis presented are those of the student alone. Names of people, corporations, businesses and governments are used only as examples in fictitious sample correspondence, statements, etc. in order to depict a realistic, albeit fictional, scenario. This does not represent any knowledge of these examples, nor does it in any way represent an endorsement by an individual, corporation, business or government.

For more information about the Commercial Diplomacy program and the M.A. project requirement, please visit


Table of Contents

A. Scenario
     B. Overview
     C. Issues
     D. Organization of the Project

Section I: Background Paper
A. History of China's Insurance Industry
B. Market Review
     1. Market Competition
     2. Market Size and Potential
     3. Foreign Companies in China
C. The Chinese Market for Insurance
     1. Consumer Awareness and Domestic Attidutes Towards Openness
     2. The Product Scope of China's Insurance Industry
     3. Key Players
D. The International Market for Insurance
E.  Legal and Policy Background
     1. China's Social Welfare Reforms
     2. China's Insurance Laws and Regulations

Section II: Analytical Papers

Commercial Analysis
    A. Reasons for Current Market Growth
     B. Market Participants
     C. The Benefits of Foreign Competition for Domestic Companies
     D. The Benefits of Foreign Competition for Chinese Consumers
     E. Domestic Insurers and Consumers Benefit from "Goodwill" Program
     F. Market Potential
     G. Conclusion
Legal Analysis
A. Domestic Law Analysis
        1. Licensing
        2. Ownership
        3. Insurance Brokers
        4. Geographic Restrictions
        5. Products and Services
        6. Investment Opportunities
  B. China's International Obligations
       1. The China-U.S. Agreement on China’s WTO Accession
       2. Understanding the GATS
Policy Analysis
A. China's Non-Transparent System for Foreign Licensing
  B. Policy Reform: Bring Commercial Insurance into China's Social Welfare Framework
       1. The Health-Care System
       2. Pension Reform
Political and Public Relation Analysis
A. Political Importance
        1. International Level
        2. Domestic Level
  B. Political and Public Relations
        1.Government Agency Interests
        2. Domestic Industry Interests
        3. Consumer Group Interests
Analysis of Impementation Issues
  A. Institutional Barriers
        1. Adiministrative Enforcement Mechanism
        2. Private Enforcement
        3. Policy and Law Measures
  B. Market Disorder

Sections III: Strategy Papers
Key Recommendations
   Domestic Public Relations Strategy
   Legislative Strategy
   Media Strategy
   Research and Education Strategy
   Implementation Strategy   
   International Strategy

Exhibit 1:        Chinese Insurance Companies
    Exhibit 2:        Foreign Insurance Companies in China
    Exhibit 3:        Examples of Life Insurers with Representative Officies in China
    Exhibit 4:        Chinese Insurance Market Premiums
    Exhibit 5:        Company Shares of the Chinese Insurance Market (1996)
    Exhibit 6:        Foreign and Domestic Compnay Market Share in Shanghai (1996 and 1997)
    Exhibit 7:        Zhangzhou Property Insurance Market Forecast
    Exhibit 8:        Insurance premiums in the Yellow River Delta
    Exhibit 9:        Insurance market forecast in the Yellow River Delta
    Exhibit 10:      Factors that Foreign Companies Believe Influence their Ability to Obtain an  Insurance
                            License in China
     Exhibit 11:     Factors that Influence How Foreign Companies Choose Chinese JV Partners   
     Exhibit 12:     Sample letter to NPA Law Committee
     Exhibit 13:     White Paper
     Exhibit 14:      Sample news letter for legislative strategy

A Strategy for Opening the Chinese Insurance Industry


This project analyzes China's current insurance policy, focusing on its “gradual, paced” policies for allowing foreign competition into the market. The goal of the project is threefold: to analyze the potential effects of allowing increased foreign competition in China’s insurance market; to generate recommendations for Chinese policymakers; and to set out a detailed plan of action for liberalizing the industry. 

China’s insurance industry has developed very quickly. Insurance premiums increased by nearly 40 percent annually from 1980 to 1998—a rate that far outpaced the country’s 9.7 percent GDP growth rate. Such growth shows that the insurance sector is increasingly important to the country’s economy. The growth is also attracting the attention of foreign insurance investors, even though China’s insurance sector is relatively closed. 

China will need to liberalize its insurance market in the near future in order to meet the commitments it made in its WTO accession agreements. Yet even if China had not made WTO commitments on insurance, current economic and social welfare reforms in China are increasing the country’s need for a strong commercial insurance industry. Although policymakers remain concerned about how the domestic industry will fare in the face of foreign competition, past experience indicates that foreign pariticipation in the insurance market can help it grow and diversify. 

With the goal of developing a coherent strategy for regulating the insurance sector in the years to come, this project analyzes commercial, legal, policy and political issues that will need to be accounted for in any liberalization effort. These analyses highlight the real impacts of foreign participation on the domestic insurance industry, and conclude that 1) the overall impact of foreign entry will be positive, and 2) the market should be opened in the near future. 

The project also outlines steps Chinese policymakers will need to take in order to liberalize the country’s insurance sector. In considering the adoption of a new policy, domestic political and public relations issues will need to be considered, as will implementation and enforcement issues. 

Finally, the project offers a comprehensive strategy for reforming the current insurance policy and legal framework. The strategy suggests Western style legislative and public relations building activities that can help the Chinese government and business community develop more fruitful relations.

A Strategy for Opening the Chinese Insurance Industry



A. Scenario 

For the purpose of this project, I assume the fictitious role of a staff analyst in the China Insurance Regulatory Commission’s (CIRC’s) Department of Policies and Regulations, Division of Policy Study. I have been tasked with developing a strategy for opening up the Chinese insurance market.


B. Overview 

From 1949 to 1988, the People's Insurance Company of China was the sole provider of insurance in China. Since 1988, however, China’s insurance industry has developed very quickly. Insurance premiums increased by 39.6 percent each year from 1980 to 1998, an impressive figure compared to China’s 9.7 percent annual GDP growth rate for the same period. Thirteen domestic companies are now established. 

The potential market for insurance in China is huge. In 1998, 120 billion yuan in insurance premiums were collected. According to the World Bank, premiums in China will reach at least 200 billion yuan (US$ 24.44 billion) by the year 2000. 

The Chinese insurance market was partially opened to foreign companies in 1992. About 202 representatives of foreign insurers now represent 11 different foreign insurance companies in China. However China’s massive market potential has led to demands from foreign insurance investors that China do more to increase access to its insurance market. Moreover, while the Chinese government has favored a "gradual, paced" policy for liberalizing the domestic insurance industry, the rapid development of China’s insurance sector is straining the government’s regulatory policies. 

With the structural transformation of China’s economy, the Chinese government has adopted a series of social welfare reforms, particularly pension and health-care system reforms that will increase opportunities for insurance companies and also create pressure for ensuring that the private sector insurance system is capable of covering growing portions of the Chinese population. With this concern in mind, the China Insurance Regulatory Commission (CIRC), a new insurance regulatory body, is considering how best to support the development of China’s domestic insurance industry, including how or if it should open this industry to increased foreign competition. 

CIRC’s concerns are compounded by the fact that China will likely join the WTO this year. China needs a strategy for living up to commitments it made during the accession process.


C. Issues 

The main obstacle to developing a policy framework for opening up the Chinese insurance industry is the concern that such opening will hurt the Chinese domestic industry, which is still in its infancy. The healthy development of the domestic insurance industry must be considered before any steps toward market liberalization are taken. 

Nonetheless, China’s experience to date suggests that increased foreign participation in its insurance market will benefit the industry’ overall development, and  China will be obligated to liberalize its insurance market if it is to join the WTO. China has already finished its bilateral accession negotiations with the United States, Canada and other countries, and it is likely to become a full WTO member within the year.

It is clearly time for CIRC to develop an overall strategy for allowing increased foreign participation in China’s insurance market. Specific issues that need to be addressed include:

  •  Licensing: To obtain a license, foreign insurers must meet national requirements that include several formal criteria. This process lacks transparency and companies report that the rules are applied unevenly. Does the CIRC need to reform the licensing criteria and improve the transparency of its process for granting licenses?

  • Geographic Restrictions: Currently, foreign insurers are only allowed to operate in Shanghai and Guangzhou. Should these areas be gradually expanded to include other coastal cities or to all of China’s large and medium-sized cities?

  • Ownership: Life insurance companies are the only insurers that are allowed to enter the market via 50-50 joint ventures with Chinese firms. Other insurance companies are only allowed to enter as branches. CIRC must determine whether or not non-life insurers should be allowed to participate in joint ventures and, if so, what percent ownership they should be permitted.

  • Scope Restrictions: Currently, China limits the products and services a foreign insurance firm may sell. For example, foreign companies may not engage in group insurance sales to Chinese citizens. Does this policy need to be reformed in order to open up the Chinese insurance market?

  • Insurance Brokers: China’s insurance law includes provisions for brokers but does not lay out whether these provisions apply equally to foreign brokers. In fact, the law is silent on foreign brokers, and as of April 1999, just one foreign insurance broker had been licensed in China. Does China need to reinterpret or change its existing rules?

  • Investment Opportunities: Both foreign and Chinese insurers are limited to investing in bank deposits and Chinese government bonds. As insurance premiums in China increase, the issue of expanding the investment opportunities available to insurers is becoming increasingly important.

D. Organization of the Project 

Section I provides background on the development and current economic situation of China’s insurance industry. It also provides general information about the market for insurance in China, the international context in which China is attempting to reform its insurance policies, and the legal and policy framework that regulates the industry. 

Section II provides in depth anaylses of commercial, legal, policy, and political and public relations issues that affect China’s ability to liberalize its insurance industry. This section also provides an analysis of policy implementation issues that will need to be addressed. 

Finally, Section III offers a comprehensive strategy for liberalizing China’s insurance market.  

A Strategy for Opening the Chinese Insurance Industry
Section I: Background paper

Background Paper


A. History of China’s Insurance Industry 

Insurance was first sold in China when two British insurance companies entered the Shanghai market in 1846. In 1875, the Merchants Shipping Bureau of the Qing Government established China’s first insurance institution, the Merchants Insurance Bureau, and for the following 150 years, foreign companies monopolized the market. Then, with the founding of the People’s Republic of China in 1949, China established its own government-controlled insurance company, the People’s Insurance Company of China (PICC), and all foreign companies withdrew. 

The PICC’s own monopoly came to an end in April 1988 with the establishment of Pingan Insurance Co. Ltd. in the Shenzhen special economic zone. When the China Pacific Insurance Co. Ltd. was established in Shanghai in 1991, a true insurance market began to take shape. Today, there are 13 domestic insurance companies operating in the country (see Exhibit 1).  

In September 1992, the American International Group’s American Assurance Company (AIA) became the first foreign insurance company since 1952 to receive approval to establish a branch office in China. Other foreign companies quickly followed suit: 

  • In 1994, Tokyo Marine Insurance Co. of Japan also received approval to establish a branch in the city.

  • Winterthur Swiss Insurance Co. opened an office in Shanghai in 1996 and became the first foreign company in China to offer property insurance.

  • In November 1996, Manulife Insurance Co. of Canada and China Chemical Industry Import and Export Corp. joined hands to establish the Zhonghong Insurance Co., the first life insurance joint venture project in China. 

Eleven foreign insurance companies with about 202 representatives are now operating in China. The most recent arrivals include John Hancock Mutual Life Insurance Co., Boston; Sun Life Assurance Co., Toronto; Prudential Assurance Co.; and Chubb Corp. (see Exhibit 2 and 3).[1] Another 113 companies from 17 countries have applied for licenses without success.


B. Market Review

 1. Market Competition 

The development of the insurance industry in the People’s Republic of China can be divided into three stages. From 1949 to March 1988, the People’s Insurance Company of China (PICC) monopolized the market. Then, with the establishment of Pingan in 1988 and China Pacific in 1991, PICC’s monopoly was broken and the market was characterized as a “tripartite confrontation.” Since September 1992, more domestic companies, as well as foreign ones, have entered the market, and true competition has begun to take shape (see Exhibit 4).  As recently as 1997, however, the premium income of the PICC, Pingan and China Pacific still accounted for 96.56 percent of total Chinese insurance premiums.[2]


2. Market Size and Potential 

Although China's’ insurance industry grew at a rapid 40 percent per year between 1980 and 1998,[3] insurance premiums in 1991 were still just 23.4 billion yuan (US$282 million). By 1997, however, this figure had leapt to 108 billion yuan (US$ 13 billion), and the total assets of insurance companies reached 164.6 billion yuan (US$ 19.81 billion).[4] During the first five months of 1999, total premiums were already 52.895 billion yuan, representing a 7.29 percent increase over the same period during the previous year. According to World Bank estimates, premiums in China will reach at least 200 billion yuan (US$ 24.44 billion) by the year 2000 (see Exhibit 5). 

The Chinese insurance industry is changing as it grows. In 1997, life insurance premiums surpassed property insurance premiums for the first time, accounting for 60 million yuan (US$7.2 billion) or 56 percent of total premiums .[5] In major Chinese cities, the life insurance share of the total market was even higher: in Beijing, it was 70.7 percent, in Shanghai, 64.8 percent, and in Guangzhou, 60.5 percent.  In the first five months of 1999, of the total 52.895 billion yuan in premiums, 31.276 billion yuan came from life insurance (up 11.07 percent from the previous year), and 21.629 billion yuan came from property insurance (up 3.06 percent).[6] 

There is no question that the Chinese insurance market holds great potential. To date, however, it remains almost completely untapped, even compared to insurance markets in developing countries. 

 Insurance Density. In 1995, worldwide per capita premium income was US$357, while China’s per capita premium income was just US$6.10. In 1996, Chinese per capita spending rose to $7.64, which is higher than India’s $1.70 per capita, but far below Thailand’s $30. If China were to reach the worldwide US$357 per capita level, premium income in China would be US$400 billion. However this level still does not approach the levels of developed countries. In 1996, Great Britain spent $1,775 per capita, and the United States spent $2,191.

  • Insurance Penetration. Premium income in developing countries generally accounts for three to four percent of GNP. In 1997, China’s premium income was 108 billion yuan or just 1.4 percent of GNP. If China were to realize the 3.5 percent average insurance penetration of developing countries, its premium income would be 261.7 billion yuan.

  • Life insurance. Although China’s life insurance premiums now represent nearly 40 percent of total premiums, life insurance represents 56.1 percent of total premiums on a worldwide basis, and 76.8 percent of premiums within Asian countries.

  • Non-life insurance. China’s market for insurance other than life insuarnce is estimated to be worth $6.5 billion.[7]

3. Foreign Companies in China 

Although AIA snatched up 45 percent the Shanghai life insurance market within in three years of entering the city,[8] the market share of foreign companies has dropped significantly in recent years. From 1995 to 1997 the Shanghai market grew about 50 percent, but foreign companies’ share of the market dropped from 20 percent in 1995 to seven percent in 1997. AIA’s share of the Shanghai life insurance market concomitantly fell to an estimated 14 percent or only 1.5 percent of the national market.[9]  

According to the China Insurance Institute, the 1997 Shanghai property insurance shares for Tokyo Marine and Winterthur Schweizerische Versicherungs Gesellschaft were only 0.46 percent and 0.16 percent respectively. Foreign companies currently hold a mere one percent of the nationwide insurance market. 


C. The Chinese Market for Insurance 

1.      Consumer Awareness and Domestic Attitudes Towards Openness 

The vast majority of Chinese people still enjoy free medical care, low-rent housing and retirement pensions. It is not surprising then that the majority also still consider insurance to be unnecessary. Even when citizens (usually in big cities) recognize insurance as a necessity, they lack basic insurance knowledge. In a survey conducted by the Beijing Road to the Future R&D Company found that only 18.6 percent of respondents said that they know insurance well.[10] 

According to a case study conducted in Shanghai, the majority of Chinese feel that the introduction of foreign insurers has advantages. They believed that the benefits of foreign participation in the market overwhelm any perceived disadvantages. A majority felt that more foreign insurers should be introduced to the market.


2.      The Product Scope of China’s Insurance Industry 

Like insurance industries in other developing countries, China’s insurance sector once emphasized business insurance such as marine, fire, commodity, transportation, and casualty insurance. Now, however, China permits insurance companies to offer either of two broad categories of insurance: property insurance and life (group and individual) insurance. Property insurance includes business property, family property, cargo transportation, motor vehicle, ship, and agricultural insurance. Life insurance instruments include “simple” life insurance (similar to term life); life insurance with saving features; group life insurance; “simple” and group disability insurance; group accident insurance; highway accident insurance; collective-enterprise employee retirement insurance; individual pension insurance; children’s education and marriage insurance; major medical insurance; and other combination products.


3.   Key Players 

Opening up China’s insurance market is a complex undertaking that involves not only the CIRC but also many other government agencies. Major government agencies that will be involved in the decision-making process include:

 The Ministry of Foreign Trade & Economic Cooperation (MOFTEC), which is responsible for foreign trade policy and represents China in WTO negotiations;

  • The National People’s Congress, which has the legislative power of the State;

  • The State Council, which is the executive body of the highest organ of state power and administration; 

  •  The Ministry of Labor and Social Security, which administers the unemployment welfare framework; and

  • The Ministry of Health, which carries out the health-care framework.

In addition to the above government agencies, the other two players are:

  • The domestic insurance companies, which claim that China’s insurance industry is still an infant industry that needs to be protected; and

  • The state owned enterprises (SOEs), which can no longer afford to be the sole providers of health and pension insurance and therefore have a large stake in seeing that effective reforms are carried out.

D. The International Market for Insurance

Insurance has been on the international trade agenda since the Uruguay Round began negotiating the General Agreement on Trade in Services (GATS), the first set of rules covering international trade in services (see Exhibit 4 for information on Asian countries’ GATS commitments). 

The WTO financial services agreement, which includes insurance, was signed in December 1997 and covers 102 countries representing 95 percent of the global financial services market. Under the agreement, which went into effect at the beginning of March 1999, 60 countries pledged to open their insurance sectors to foreign competition. Fifty-five nations now allow 100 percent foreign-owned subsidiaries and branches. Ten additional countries allow majority control. Only four countries—the Dominican Republic, Honduras, Sri Lanka and Tunisia—do not permit majority ownership. Malaysia allows 51 percent for existing investments but only 30 percent for new ventures. 

The developed countries, especially the United States, treated the 1997 agreement as an historic accomplishment. In a letter to the President Bill Clinton, the Washington-based International Insurance Council claimed victory stating that the agreement “captures more than 98 percent of the world’s insurance business in over 60 countries within a system of binding foreign trade principles. The USTR takes great satisfaction in the success.”[11] There is no doubt that developed countries are in a much better position to benefit from the WTO agreements on insurance than are developing countries. 

While China is not a WTO member yet, it is expected to gain membership within the year 2000. Liberalization of China’s insurance industry has been a major issue for both the United States and the EU during accession negotiations.  


E. Legal and Policy Background 

1. China’s Social Welfare Reforms  

As part of its overall program for resutructuring the country’s economy, the Chinese government has launched a series of social welfare reforms. In turn, these reforms are generating a growing need for private, commercial insurance. Commercial insurance will play an import role in maintaining social stability in the country. 

  • Pension Reform. This was one of the first components of the social security system in China to be selected for reform. China’s social security system was designed to deliver most social services and benefits through SOEs. Now, however, with the SOEs increasingly unable to meet their social service obligations, the government has proposed the so-called New Unified Pension System Reform, which shifts publicly funded pensions from the SOEs to a mix of private and public providers. The shift will offer good opportunities for insurers.

  • Health Care Reform: In China’s urban areas, where approximately 30 percent of China’s 1.2 billion people live, there are two formal health insurance systems: the government system and the state enterprise system. Roughly only 140 million workers and 60 million family members were covered under these two systems at the end of 1997.[12] In rural areas, only 120 million farm and village enterprise employees are covered by the government system, the so-called Cooperative Medical System (CMS). Around 64 percent of the rural population still has no health insurance at all. In 1994, China’s State Council began studying how to improve China’s overall standard of health care and how to reform the current urban health care system.

2.  China’s Insurance Laws and Regulations 

The rapid expansion of China’s insurance industry in the 1980s pushed the Chinese government to begin establishing laws and regulations to manage the insurance market and make it more competitive. In 1992, to regulate the experimental opening of the Shanghai insurance market, the government issued the Shanghai Administrative Measures for Foreign-Invested Insurance Companies, the so-called Shanghai Measures. Some of these measures also applied to Guangzhou. 

Then, on June 30, 1995, a national insurance law was promulgated at the fourteenth session of the Standing Committee of the Eighth National People’s Congress of China; it became effective on October 1, 1995. The insurance law mainly focuses on regulating the domestic insurance industry. It also includes some provisions on foreign insurers. In 1996, the Provisional Regulations for Administration of Insurance were established to supplement the insurance supervision section in the 1995 law.  

In 1997 and 1998, partly in response to the growing number of door-to-door sales agents in a number of industries, new regulations were enacted to control the activities of insurance agents and brokers. The government issued the Provisional Regulation for Administration of Insurance Agents in November 1997, and the Provisional Regulation for Administration of Insurance Brokers in February 1998. 

Self-regulation by the insurance industry is developing rapidly as well. In 1994, the Shanghai branches of PICC, Pingan, China Pacific, and AIA formed China’s first insurance industry association to coordinate and self-regulate the insurance market in Shanghai. By the end of 1997, insurance companies had established industry associations in 19 cities. 

Chinese law and regulations stipulate that insurance companies and agencies must regard property and life insurance business as separate entities. Additionally, the 1995 insurance law stipulates that premiums can only be deposited in banks or used to purchase government and financial bonds or various other funds approved by the State Council. According to the law, “the use of premiums to establish securities institutions or invest in enterprises is strictly prohibited.” 

As for foreign participation in the Chinese insurance market, the insurance law lays out the following rules: 

1.      To obtain a license, foreign companies must: (a) have been established for more than 30 years; (b) have maintained a representative office in China for over two years—an office that is not allowed to sell insurance; (c) have total assets of more than $5 billion at the end of the year prior to their license application.

2.      Licensed foreign insurance companies must gain government approval before they begin selling any new insurance products. (Approval generally takes 3-6 months.)

3.      Foreign insurers are limited to operations in Shanghai and Guangzhou.

4.      Life insurance companies can be licensed to form 50-50 joint ventures with Chinese firms. Non-life companies can be licensed only as branches. Foreign insurance companies are licensed as either life or non-life companies, but may not write both types of insurance.

5.      Premiums can only be invested in bank deposits, government or financial bonds, or other fund allocation methods approved by the State Council. The use of premiums to establish securities institutions or invest in enterprises is strictly forbidden.

6.      Foreign property/casualty insurers may only do business with foreign companies operating in China. They may not underwrite Chinese businesses or individuals.

7.      Foreign life insurers may not sell pension products or make group insurance sales to Chinese citizens (which account for over 60 percent of the market).

8.      Foreign investment in Chinese insurance companies is limited to a maximum of five percent for each foreign company. Total foreign investment in any one Chinese company is limited to 25 percent.


Despite the clarity of these provisions, the process that foreign companies must go through to obtain a license lacks transparency and each company seems to be evaluated based on different criteria. Personal contacts, support from a company’s home country government, and a company’s “demonstrated commitment to the Chinese market” in the form of contributions to the Chinese economy are reportedly deciding factors in obtaining a license.

[1] China's insurance market, available from, accessed 12 Dec. 1998.

[2] Ibid 1.

[3] JingXiao Xue, The Progress in Multilateral Negotiations on Financial Services and the Opening-up of Chinese Financial Industry, 1998.

[4] New star publishers, Insurance Reform and Development, 1997.

[5] China’s reinsurance sector premiums were Yuan 9.6 bil in 1997, available from  Internet, accessed Dec. 1998.

[6] Nationwide Financial News, available from Internet, accessed July 1,1999.

[7] China—opportunities and obstacles for the insurance industry in an emerging country, CPCU Journal, Spring 1998.

[8]   Ibid 4.

[9] Impact of Foreign Insurance Company Entry into the Chinese market, AmCham Insurance Industry Forum, May 1998.

[10] Qixiang Sun, China's Insurance Industry: Contradiction, Challenges and Countermeasures, 1998.

[11] John Jennings,  U.S. insurers hail WTO deal to life world trade barriers, National Underwriter; Chicago, Dec. 1997.

[12] Xuesheng Li, The Health Market,  The China Business Review; Washington ; Nov/Dec 1998.


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