This content is from: Portfolio

Luxembourg Angles to Become Europe’s Financial Gateway to China

The grand duchy is leveraging its mutual fund business and euro zone status with success, overtaking London for dim sum bond issuance.

Most bankers in Europe know the importance of Luxembourg as a financial center, by virtue of its giant mutual fund business, but few recognize the grand duchy as Europe’s top trading and depository center for the Chinese renminbi. Luxembourg authorities are determined to change that, launching a global campaign to promote the country’s prowess as a center for financial business denominated in the “people’s currency.”

Officials back their assertions with data. Take, for instance, the fact that institutional investors have deposited 635 billion yuan ($102 billion) worth of Chinese securities in accounts in Luxembourg, the largest such pool in the European Union. Meanwhile, asset managers have 262 billion yuan in renminbi-denominated mutual funds in Luxembourg, also the largest such pool in Europe.

The tiny country (population 539,000) has also grabbed a big slice of the market for so-called dim sum bonds. With 44 bond issues worth a combined 33 billion yuan, Luxembourg boasts a 16 percent share of the market for renminbi-denominated offshore corporate bonds. It surpassed London by market share in the first quarter and now ranks in third place globally, behind Hong Kong (36 percent market share) and Singapore (30 percent), in terms of bond issuance.

“Luxembourg is in the euro zone, whereas London is not,” notes Stéphane Karolczuk, the Hong Kong chief representative of Arendt & Medernach, Luxembourg’s largest law firm. “This may explain why we are so successful.”

But Luxembourg would like to capitalize even more on the internationalization of the renminbi, says Marc Saluzzi, a partner of PricewaterhouseCoopers and the chairman of the Association of the Luxembourg Fund Industry. “We are working hard to maintain our position as the top offshore RMB center in the EU,” says Saluzzi.

During a trip to Beijing in early July led by Finance Minister Pierre Gramegna, Luxembourg authorities signed a memorandum of understanding with the People’s Bank of China to begin the process of setting up a renminbi clearing bank. Officials hope that such a bank will consolidate Luxembourg’s position as the top renminbi center of Europe.

“The relations between Luxembourg and China are very important,” says Saluzzi, who was a member of the delegation of some 70-plus Luxembourg officials and executives on the trip. “That is why we are visiting China at least once a year to maintain the connections.”

Although Switzerland continues to be the leading wealth management center in Europe, the fact that the nation isn’t a member of the European Union has hurt it in terms of fund administration of euro-denominated assets. As a result, Luxembourg dominates the European mutual fund business with €2.6 trillion in assets under management, a number that ranks second only to the U.S. in terms of fund assets.

“Because we are in the EU and operate under the EU’s Undertakings for Collective Investment in Transferable Securities, or UCITS, directives, we can help Chinese fund managers and financial institutions to effectively access European markets,” says Saluzzi, who notes that many of the Chinese banks operating in Hong Kong have in recent years also opened branches in Luxembourg. They include Bank of China, Industrial and Commercial Bank of China, China Construction Bank and China Merchants Bank.

Luxembourg authorities also hope to persuade their Chinese counterparts to soon include the grand duchy in the RMB qualified foreign institutional investor program. That would allow investors with renminbi holdings in Luxembourg to invest directly in the capital markets on the Chinese mainland.

In order to get a so-called RQFII quota, Luxembourg needs to hold a strategic dialogue with China. “It will be a balanced deal of what China can give you and what you can give China,” says Saluzzi. The inclusion of Luxembourg in China’s RMB repatriation investment program would follow the establishment of an RMB clearing bank in the country.

Saluzzi says there is no reason why Luxembourg, despite being landlocked between Belgium, France and Germany, can’t be Europe’s foremost financial gateway to China in the decades to come.

“In the longer term, we have a twofold objective,” he says. “We want to help Chinese fund managers and financial institutions to expand globally through the use of Luxembourg as a financial center. We also hope to convince European and global institutional investors to tap into China through Luxembourg.”

Follow Asia Bureau Chief Allen T. Chen gon Twitter at @acheng87.

Get more on foreign exchange and fixed income.

Related Content