Grand Duchy has become a preferred destination for funds investing in China
The friendship between Adolphe Franck, a Luxembourgish railway worker, and Mao Zedong, founding father of the People’s Republic of China, was the foundation for four decades of close relations between the world's most populous nation and one of its smallest. Franck, an ardent communist, met the Chinese Communist party leader many times for business, sharing his patents on steam locomotives and rising to national fame across China. In 1979. the Bank of China chose the Grand Duchy as the location for its first overseas branch, a move that is largely attributed to Franck’s legacy. Since then, Luxembourg has become host to the European headquarters of six other major Chinese banks and an administrative hub for cross-border investment into and out of China. As the renminbi’s use in international transactions has grown, financial centers such as Luxembourg have vied to become the location of choice for renminbi-denominated business. At the end of June 2019, the Grand Duchy hosted almost 80 percent of European (including the UK) funds offering some exposure to mainland China by assets under management, according to PwC research. Over the past four years, the value of assets at funds in Luxembourg offering Chinese securities doubled to reach more than $40bn in April 2020, according to Refinitiv data.
In May 2011, the Luxembourg Stock Exchange (LuxSE) became the first in Europe to list an offshore renminbi bond. Since then, LuxSE has put up for sale more than 210 “dim sum” bonds issued by companies, which are popular with investors seeking exposure to debt securities in the Chinese currency. As of June 2019, Luxembourg accounted for over a quarter of the world’s dim sum bond listings, ahead of rival centers in the UK, Hong Kong, and Taiwan. Luxembourg was among an early group of European countries — including the UK, France, and Germany — designated as an offshore renminbi center by the People’s Bank of China, enabling it to process commercial trade and financial transactions in China. In 2013, Luxembourg’s financial regulator CSSF authorized the first renminbi qualified foreign institutional investor under the EU’s undertakings for collective investment in transferable securities (Ucits) scheme, effectively enabling Luxembourg-based funds to apply for quotas to invest in Chinese securities. It also granted the first authorization to a Luxembourg Ucits to trade through the Shanghai-Hong Kong Stock Connect. Becoming an offshore renminbi hub early in the currency’s internationalization process gave Luxembourg’s financial authorities useful experience in renminbi matters, says Dariush Yazdani, a partner at PwC’s Luxembourg office. The presence of large Chinese banks has also encouraged other Chinese financial services companies to set up in Luxembourg, Mr. Yazdani adds. As global investors have sought exposure to China’s growing green finance market — albeit amid concerns of its divergence from international environmental, social, and governance standards — Luxembourg has also become a preferred gateway for Chinese issuers of green bonds wanting to tap European markets.
