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Funds: A pair of announcements this year have put the Grand Duchy’s financial centre on better footing with the Middle Kingdom’s markets.
The business relationship with China has become closer over the last two months. Most significantly, Luxembourg-based funds are now able to invest directly into China, buying shares, bonds and so on with the local currency, the renminbi (RMB).
Luxembourg was granted a quota under the “renminbi qualified foreign institutional investor” (RQFII) scheme by the Chinese central bank on 29 April. This is part of China’s policy of gradually opening the economy and making the RMB a globally traded, convertible currency.
The country likes to take things easy, with the RQFII scheme beginning in 2011 with a few China-based firms benefiting. This was expanded in March 2013 when a dozen international banks and asset managers with a presence in Hong Kong were given some access.
In actual terms the move is quite small, as it will allow investment of RMB 50bn (€7.2bn), a figure which equates to 0.2% of all the funds based in Luxembourg. This will give this country around 16% of all RQFII quotas granted. This is justified due to this country being the world leader in international cross-border funds with 9.3% of global assets based there.
Not having a quota had meant Luxembourg based funds had to use Hong Kong until this spring. Around RMB 300bn (€43bn) in funds are currently domiciled in the Grand Duchy. Now asset managers will be able to request a share of the Luxembourg quota after meeting requirements set by Chinese authorities.
London & Frankfurt
However, the symbolic value is huge as it demonstrates again the plans the Chinese authorities have for this country. “The announcement indeed is very good news for Luxembourg,” commented Nicolas Mackel, chief executive of the trade promotion body Luxembourg for Finance. “After the designation of a clearing bank last year [ICBC Luxembourg], we now have all the necessary tools onsite a fully functioning renminbi centre needs to have.” These are early days, though, with non-Chinese investors still only having access to less than 0.5% of the combined market capitalisation of the Shanghai and Shenzhen stock exchanges.
So the ramping up of Chinese presence in this country continues, with Luxembourg becoming a hub for renminbi-denominated investment funds, capital markets activity and banking in Europe. This gives it a complementary role to London and Frankfurt, which the Chinese are making their EU centres for foreign exchange and trade finance. As well as the six largest Chinese banks having their EU headquarters here, there have also been 63 issuances of RMB denominated bonds on the Luxembourg Stock Exchange, to a total value of RMB 35bn (€5bn).
“Our main objective is to demystify the renminbi, why it is used and what can be done with it,” explained Robert Scharfe, the exchange’s chief executive. International investors have a problem because China’s strict capital controls prevent them from investing most of the renminbi they hold. Luxembourg is part of the solution.
“Renminbi is not freely convertible but in other respects it is like any other currency with a full range of products, allowing investors to diversify their investments and earn a higher yield,” he added.
Scharfe is confident that they are about to see the first Chinese non-bank corporate bond listing in Luxembourg. He is pleased with the growing diversification of issuers. “In 2011, listing was by traditional international corporations and banks, but today we are seeing a wide range from the west and Asia,” he pointed out.
Chinese banks have recently come on board. Longer term, the potential is huge because China needs western investment. “Thousands of securities are listed on the Chinese stock markets, and so if a fraction of these decide to move into international capital markets then we can really expect a lot more,” he added.
Coincidentally or not, 40 days before the RQFII announcement Luxembourg was the first non-Asian country to be accepted as a candidate as a founder member of the Asian Infrastructure Investment Bank. This body is seen by some as a Chinese challenge to the American-based World Bank and International Monetary Fund, and the US was thought to have asked its allies to not sign up to this initiative. The Grand Duchy is now competing with other members (including the UK, Italy, France and Germany) to host the AIIB’s EU HQ.
So how complicated is it to do business in China for Luxembourg firms? “It is not more or less than in many other places of the world,” said Michael Ferguson of the consulting firm EY Luxembourg.
“What do you want to accomplish?”
“Articulate a concrete strategy and be clear in expectations before tapping into any new market,” he advised. “Some questions are: What do you want to accomplish? Is your vision to merely participate in China’s growth to some degree or are you seeking a larger presence? Is the investment long-term oriented? What do you want to accomplish, by when and how?”
It’s a question of taking the time to understand the risks that may be encountered and to appreciate cultural differences.
That said, he points out that “risk can never be completely avoided, no matter whether you are in China or in Luxembourg.” Obtaining unequivocal cooperation can be a challenge, with resistance coming in different, more subtle ways than one might be used to. “Foreign firms should always try to clearly understand the needs and interests of all relevant stakeholders in China,” he added.
The Chinese investment programmes will be discussed during the Luxembourg Renminbi Forum organised by Luxembourg for Finance on 3 June.