Luxembourg reaps rewards of lengthy Chinese friendship

Luxembourg had nurtured a relationship with China for a long time before the Asian dragon embarked on a spectacular growth trajectory to become today’s political and economic powerhouse. The late Adolphe Franck, a Luxembourg railway employee and a resolute communist, travelled many times to the China of Mao Zedong and gained the trust and respect of Chairman Mao himself, whom he visited multiple times.

Mr Franck earned Luxembourg so much goodwill that in 1979, the Bank of China chose the country as the location of its first overseas representation since the creation of the People’s Republic, ahead of more established European countries. With their characteristic ability to spot trends ahead of time and react quickly, Luxembourg’s authorities strengthened the connections made by Mr Franck, so that once the Chinese economy took off they could capitalise on the work done in the previous 30 years and become the key hub for Chinese finance in mainland Europe.

Ahead of the pack

Luxembourg stole in ahead of its European peers when the country joined as a founding member of the Beijing-sponsored and newly formed Asian Infrastructure Investment Bank (AIIB) in 2015 – another 17 EU members would soon follow suit. Four years later, Luxembourg hosted the AIIB’s annual meeting, the first such event that the multilateral bank organised outside Asia, giving the country a chance to assert its role as a main gateway of finance in and out of China.

“We are the largest and most international investment fund centre in the world,” says Pierre Gramegna, the finance minister of Luxembourg. “In terms of asset under management, we are second only to the US. We offer a very interesting platform to attract private capital into projects. That’s one way we can work together [with our Chinese partners].

“Another one is the green exchange. Launched two-and-a-half years ago, it is the only one in the world that lists green bonds and socially responsible bonds exclusively. Today, more than half of all the green bonds listed worldwide are listed here. As the AIIB’s motto goes: 'lean, clean and green';  I see a lot of potential there to work together.

“A third way to work with China is that by being, in essence, an international financial centre and the place where the European Investment Bank [EIB] is located, Luxembourg is a very natural place to work with the AIIB, as the set-up and vision that led to the creation of the EIB is quite similar to that of the AIIB.”

Chinese expertise

Passengers at Luxembourg Airport are welcomed by a billboard celebrating Bank of China’s 40 years in the country. In 1979 a Chinese bank may have been a rare sight in Luxembourg, but it has been followed by a further six Chinese banks over the past two decades, including the Industrial and Commercial Bank of China, China Construction Bank, and the Agricultural Bank of China, which alongside Bank of China make up the country’s so-called 'big four' state-owned banks. 

“The Chinese segment is characterised by Chinese banking groups establishing their European hub in Luxembourg and, by extension of business activities, into the EU via an extended branch network,” said consultancy PwC in its 2019 report on the banking industry in Luxembourg.

Chinese banks’ activities in Luxembourg focus largely on corporate banking (trade finance, project finance, bilateral and syndicated loans), and by the end of 2018 they employed 790 people. Chinese banks are growing locally on the back of the expanding volumes of financial investment in and out of China handled through Luxembourg-registered instruments. As much as 79.5% of European assets invested in China are Luxembourg funds, and 30.9% of global investment funds investing in China are Luxembourg-domiciled funds, according to figures from PwC Market Research Centre and research firm Lipper.

The country’s role as a renminbi hub has been strengthened further by its hosting of the first emission of a dim sum bond (offshore renminbi-denominated debt notes) outside greater China in 2011. Eight years on, Luxembourg is the largest centre for dim sum bonds outside Asia, with a market share of 20% of the global market, second only to Hong Kong (22%) and ahead of London (18%), according to figures from the Luxembourg Stock Exchange.  

Fintech drive

Yet Luxembourg is not done yet with China. As the second smallest EU member after Malta, the country has gained a name for punching above its relatively lightweight status by taking early steps into emerging segments of the financial industry. Mr Gramegna is now committed to making green finance and fintechs the new frontiers of Luxembourg’s relationship with China.

The country ranked second overall in the latest reading of the Global Green Finance Index by London-based research firm Z/Yen, behind Amsterdam and ahead of Copenhagen, and the Luxembourg Stock Exchange has a opened green bond channel in partnership with the Shanghai Stock Exchange to translate and publish in English information about Chinese green bonds. Looking forward, local authorities are betting on attracting more green bonds from Chinese issuers, including the AIIB, which unveiled a $500m sustainable bond programme in July 2019.

In the fintech sector, Brexit has boosted Luxembourg’s role as a destination of choice for global payment  and e-commerce companies such as PayPal, Amazon and Rakuten. In 2017, Chinese e-payment solution provider PingPong was the first Chinese fintech to invest in Luxembourg. In June 2018, the company doubled down on its local operations by announcing a €100m investment plan, which included R&D operations. Alipay, the e-payment company of e-commerce giant Alibaba, also set up shop in the country to hedge against any Brexit-related risks and retain a licence to do business within the EU.

It may be geographically small, but Luxembourg has carved a substantial niche for itself in the world of Chinese finance. And as China keeps deepening its financial markets and fintech industry, Luxembourg’s dividends are likely to grow accordingly.