The Chinese invasion
Until the middle of the 19th century, Asia was the economic centre of the world. After the Opium War and the Indian Revolution, it was replaced by Europe and the US. Since the beginning of the financial crisis, the pendulum is swinging back to Asia once again. By 2050, its GDP share is projected to amount for 52% of the world’s economic power.
During her visit to China at the beginning of the year 2012, German Chancellor Angela Merkel’s request for financial support for the European rescue package was rejected by the Chinese government. China, long being ill-reputed as a low cost country with questionable human rights and a flourishing imitation industry, has been catching up rapidly. Ailing Europe has become its main target market and thus, the Chancellor‘s appeal for help was not in vain.
The current shift in power is also seen in the fact that just recently, the world‘s second largest bank by market value, The China Construction Bank, decided to open a subsidiary in Luxembourg. Chinese banks recently complained in a letter to the UK Treasury that opening a branch in London would be too complicated and thus they preferred Luxembourg to London.
The close relationship to the Luxembourg government and the Ministry of Finance is indeed one of the reasons the world‘s largest bank by market capitalisation, Industrial and Commercial Bank of China (ICBC), has a representative office in the Grand Duchy since 1998, which was quickly upgraded to a branch in 1999.
“Luxembourg offers an attractive legal and business framework with political and social stability, a skilful and multilingual workforce and a favourable tax regime“, says Gao Ming, General Manager of ICBC Luxembourg branch and Chairwoman of ICBC (Luxembourg) S.A., which was named ICBC ( Europe) S.A. in 2011 and serves as the group‘s European continent headquarters. “When our group’s head office considered choosing an EU network expansion platform in 2009, it was inevitable to think of ICBC Luxembourg, from where we could expand our EU network in the most efficient way. In 2011, we opened five branches out of Luxembourg, namely Paris, Brussels, Amsterdam, Milan and Madrid at the same time. In 2012, ICBC Europe set up two more branches in Warsaw and in Barcelona.”
Behind the background of more and more European companies going to China and in return, more and more Chinese companies coming to Europe, ICBC Europe focuses on its European customer base, especially those that invest in China or have trade transactions with Chinese enterprises. “Chinese companies with investments in Europe, especially those companies which are ICBC key clients in Mainland China are definitely our major clients in Europe”, Gao Ming explains. “We try to give them better service and offer them solutions for their investments and development in both China and Europe. On the private banking side, we serve both wealthy Chinese and local private clients who have a special preference or need for RMB products or products linked to the Asian economy.”
In 2011, the cross-border RMB settlement and trade finance volume of ICBC Europe accounted for 15bn in assets under management. As the group‘s key product, Mrs Gao strongly welcomes and actively supports the initiative of the Luxembourg government to promote the local financial centre as Europe‘s hub for RMB products. “We benefit from the sped up internationalisation of the Chinese RMB by expanding our offshore RMB financial services. RMB products and services are our strong edge and competitive advantage when we enter into partnerships with the big local companies.”
Not being considerably affected by the European crisis, the best for the Chinese banks in Europe is yet to come. Being more conservative and prudent in expanding new business other than their core business than its European counterparties, Chinese banks successfully escaped from the recent years’ financial tsunami relatively unscathed. “European banks are more client- and market-oriented and experts at high-value-added business such as private banking and wealth management“, Mrs Gao illustrates. “What Chinese banks can learn from Europe is how to explore new business opportunities with lower capital requirements and an improved revenue structure.”
According to forecasts, China will overtake the US as largest economy in the world by the year 2020. Already, Chinese companies are competing hard in the domestic market, causing them to search for new investment opportunities abroad. “This development will bring more opportunities for our overseas branches and also for Luxembourg to see more business opportunities from China”, Xue Jian, Head of Corporate Banking & Financial Institution Department at Bank of China (Luxembourg) S.A., says. “They will use Luxembourg as a distribution channel or even as the final destination of investments. If the Chinese economy continues to grow in the coming years, the middle and the upper classes will be enormous. They will try to find a good allocation of their wealth. By then, I‘m confident that the Chinese government will loosen capital control. People will move more wealth out of China to elsewhere in the world. Luxembourg is a very good place for them. The private banking and the fund sector will directly benefit from this trend”.
Bank of China Luxembourg S.A. was the group’s first bank in continental Europe when they opened their branch in Luxembourg in 1979. Legally, the Luxembourg entity is both a branch and a subsidiary. With the help of the European passport, European branches can be easily set up in other countries out of Luxembourg. “We set up the branches in Rotterdam, Brussels, Warsaw and Stockholm; currently, we are setting up a branch in Lisbon. If we were to set up from our head office, it would take us a long time because of the regulatory needs”.
Similar to ICBC, Bank of China‘s main business is syndicated loans for overseas Chinese, as well as European companies. Since for Chinese companies assets in Europe are getting cheaper compared to the years before the crisis, Bank of China has benefitted strongly from this trend. “The strength of Luxembourg is for instance that the government is very close to business and it readily adapts itself to the market situation and the changes going on in the world. Luxembourg really listens to the business community and supports their development”, Mr Xue says. According to his experience, Luxembourg is not yet well known in China. “The Shanghai Expo helped Luxembourg boost its image, but there is still a lot of work to be done“.
Despite the various relationships between the Luxembourg financial centre and China and the advantages a small country with a strong economic sector can offer, Luxembourg will always remain the little brother of the rising star. Mr Xue is confident that the wave of success in the region will continue. “China still is the most important market in all of Asia because the Eastern coast is already very developed. Shanghai is much better developed than even New York and or London. In Mainland China, there is still a lot of land available. In Vietnam and India, the population is ready for the changes to come. The whole population is very young and now that China’s labour costs are rising, a lot of industry is moving to these other countries. This will bring them a big domestic market and educated staff. Regarding the financial industry, in China the strongest banks have always been the traditional Chinese banks. I don’t think the foreign banks can really compete with them. If we are strong in China, we can also be competitive overseas”. EA