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June 2019

BUILDING BRIDGES TO EUROPE AND THE WORLD

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Over the last 40 years, seven major Chinese banks have set up their EU hubs in the Grand Duchy, establishing Luxembourg as China’s de facto gateway to the European Union. This choice was not haphazard. We invited the current Luxembourg Minister of Finance and three of his predecessors to look back at how the China Luxembourg relationship was established, the efforts made over four decades to sustain that relationship and what may lie ahead.

LONG-STANDING FRIENDS AND ALLIES

Jacques F. Poos, Minister of Finance in 1976, is impressed by the changes China went through over the past four decades. “I still have that picture in my mind, when we were travelling by train in China, where we saw thousands of men and women working in the fields. Today, while travelling the same route, you drive by rows of skyscrapers.”

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There were objective strategic considerations behind the decision. The Chinese came to hear that there were talks about a common European currency.

JACQUES F. POOS

In the mid nineteen-seventies, Luxembourg wasn’t the same it is today. The financial centre was well established, but business was largely conducted with banks from neighbouring markets: Belgium, Germany, France and to some extent the United Kingdom.

China and Luxembourg were poised to break new ground. On the one hand, the Luxembourg government was eager to expand the reach of its financial industry into new regions such as Asia. China, on the other, was contemplating a new strategy: that of carefully opening up its economy to the global markets. As a consequence, trade between Europe and China was gradually growing, alongside mutual investment.

Jaques Poos

One man played a crucial role in connecting Luxembourg to China. Adolphe Franck, a Luxembourg railway employee and as a convinced communist, also a fan of Mao Zedong. He visited China multiple times and met frequently with the leadership of the Chinese Communist Party, including with Chairman Mao. He held some patents on technical improvements for steam locomotives, which he donated to communist China. Mr. Franck rose to become something of a national hero in China, even beyond Mao’s death in 1976.

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A decade later, Deng Xiaoping declared Europe to be China’s objective ally.

Jacques Poos

“The Chinese were very grateful and always rolled out the red carpet for Mr. Franck. He was even received by Mao several times for a personal meeting. This was the best business card to establish a good economic relationship between China and Luxembourg,” recalls Jacques Poos.

The decision in 1979 by the Bank of China to open its very first overseas representation since the creation of the People’s Republic in 1949 in Luxembourg, can thus be largely be attributed to the goodwill Mr Franck had earned Luxembourg.

This was a major international event and a strategic move by both sides, Jacques Poos admits: “There were objective strategic considerations behind the decision. The Chinese came to hear that there were talks about a common European currency and this helped Luxembourg to attract banks. A decade later, Deng Xiaoping declared Europe to be China’s objective ally.”

Jacques Santer

SMALL COUNTRIES NEED GREAT FRIENDS

“Personal relations are crucial in politics and they were particularly important in attracting the Bank of China,” underlines Jacques Santer, referring to the merit of Adolphe Franck whose high esteem and influence in China were crucial to the decision. Jacques Santer held the Ministry of Finance for 20 years, during 11 of which he was also prime minister.

Freshly arrived in office, he inaugurated the Bank of China subsidiary in 1979. “Bank of China was the starting point for the financial relationship with China,” he adds. It was moreover the 100th bank to operate in Luxembourg.

The Luxembourg government took further action to enhance the country’s general attractiveness as a financial hub. In 1988, the Grand Duchy was the first member state of the European Community to implement the UCITS Directive that created a cross-border market for retail investment funds. As a first-mover it now had a clear competitive advantage over other European cities. “As a small country you always have to be the first. And we accomplished that. I also believe that a small country needs great friends; a strategy Luxembourg has always pursed – in the financial sector, the steel industry and with our Embassy in Beijing”.

Jacques Santer held this mindset after his appointment as President of the EU Commission in 1995. Despite efforts, the Chinese financial sector was still not open enough, causing difficulties within the World Trade Organisation. The European Union strove hard to enhance trade relations.

For his engagement, Jacques Santer was awarded an honorary doctorate from the China Europe International Business School (CEIB), which was founded in 1994 and co-financed by the European Commission.

AN OFFENSIVE PROMOTIONAL STRATEGY

Jean-Claude Juncker took over responsibility as prime minister and minister of finance in 1995. Three years later he appointed Luc Frieden Minister of the Treasury in charge of financial services and in 2009 Minister of Finance. In the late ‘nineties Luxembourg adopted an even more focused approach towards China, and Asia in general, as part of a strategy to internationalise and diversify the financial centre.

“I saw that we needed intensive marketing efforts towards China,” says Luc Frieden, “that’s why I visited China regularly to build a relationship of trust with the Chinese authorities and with the leaders of the main Chinese banks”.

Luc Frieden

Luxembourg was well-known in Hong Kong, thanks to a vigorous investment fund business, but it was equally important to establish strong relationships with Beijing. With the support of the Luxembourg financial industry and the private sector to create the necessary “political push”, the Grand Duchy succeeded in attracting further Chinese banks. “China had a very strong growth rate at that time and the Chinese wanted to internationalise their currency. I was able to tell them that Luxembourg would be the ideal place from which to do this,” continues Frieden.

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China had a very strong growth rate at that time and the Chinese wanted to internationalise their currency. I was able to tell them that Luxembourg would be the ideal place from which to do this.

Luc Frieden

In 1999 the Industrial and Commercial Bank of China (ICBC), the world’s largest Bank, set up in Luxembourg and made it into its EU headquarter in 2009. Luc Frieden remembers very well the decisive meeting that took place in a huge boardroom in Beijing: “I explained to the chairman how he could use Luxembourg as a gateway to the European market. I listed the benefits of the Grand Duchy: our stable, business-friendly environment, our multicultural and multilingual workforce and our cross-border, friendly mentality. Shortly after this meeting, he called me back and he said: “We chose Luxembourg!”,” quotes Luc Frieden proudly.

It was also under Luc Frieden’s term in office that Luxembourg sought to position itself more broadly as a Renminbi hub, building on the activities of the two large banks that already operated in the Grand Duchy. This included for instance the first Dim Sum Bond listing outside Greater China in May 2011 at the Luxembourg Stock Exchange, as well as the authorisation in November 2013 of the first UCITS fund investing through the RQFII scheme. Another feather in his cap was then the decision of China Construction Bank to chose Luxembourg as well for its EU hub in 2013, following a ministerial visit to the group’s headquarters in Beijing.

Pierre Gramegna

MAIN PRIORITIES: CHINA, GREEN FINANCE AND FINTECH

Pierre Gramegna became Finance Minister in December 2013 and made China into one of his top priorities, likely breaking all records of ministerial visits to China with 4 visits in one year alone. He set out to take Luxembourg’s relations with China in the financial services area to a new level and the strategy worked out with several other Chinese banks setting up operations in Luxembourg: Agricultural Bank of China in 2015, China Merchants Bank and Bank of Communications in 2016 and, last
but not least, China Everbright in 2017.

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"The Grand Duchy’s triple-A rating, its openness to trade, investment and services were additional elements."

Pierre Gramegna

“The influx can be explained by the fact that China, like all Asian countries, prefers to focus on long-term relationships. The Grand Duchy’s triple-A rating, its openness to trade, investment and services were additional elements,” explains the Minister Gramegna. The relationship was also built out in capital markets and asset management to the point that Luxembourg today has a worldwide leading market share in Dim Sum Bond listings as well as in investment funds investing in Chinese equities or debt.

More generally, Pierre Gramegna promoted the diversification of the financial centre
by setting green finance and FinTech as further top priorities and this plays well into Luxembourg’s connection with China.

China is the second largest issuer of green bonds after the United States and a key player in this field. The Luxembourg Stock Exchange has intensified its cooperation
with its Chinese counterparts and taken different initiatives to create a Green Bond
Channel through which it displays information on the Chinese green bond oer in English to global investors and lists itself also a large number of green bonds from Chinese issuers directly.

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We’ve been able to create a framework in the field of e-payments where we are very well positioned.

Pierre Gramegna

“That has attracted a lot of attention and will help us also for the future, because in terms of green bonds “we ain’t seen nothing yet” – as the songs says. Only 2% of the bonds issued worldwide last year were green bonds, so that leaves 98% that are not. The potential is huge and Luxembourg is extremely well positioned in this area,” the Finance Minister explains.

In 2015 Luxembourg joined the Asian Infrastructure and Investment Bank (AIIB) as the first non-Asian founding member and the Grand Duchy will host the Bank’s fourth annual meeting in July, the first to be held outside Asia. The event should put Luxembourg firmly on the map in terms of green investment.

Regarding FinTech, another top priority, Luxembourg is home to a number of global payment companies such as Paypal, Amazon and Rakuten. In this field, again, China has proven to be a strong and reliable partner. Together with PingPong and, more recently, Alipay, both of which have set up European headquarters in the Grand Duchy, Luxembourg has established itself as the world’s e-payment capital in just a few years.

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Green finance and Fintech, combined, will allow us to grow quite nicely in the future.

Pierre Gramegna

Regarding FinTech, another top priority, Luxembourg is home to a number of global payment companies such as Paypal, Amazon and Rakuten. In this field, again, China has proven to be a strong and reliable partner. Together with PingPong and, more recently, Alipay, both of which have set up European headquarters in the Grand Duchy, Luxembourg has established itself as the world’s e-payment capital in just a few years.

“We’ve been able to create a framework in the field of e-payments where we are very well positioned. This is due to the fact that we have a very efficient, business-friendly Regulator, that is keen to understand the needs of companies companies while at the same time strictly complying with all applicable regulation, notably the EU Payment Services Directive,” Minister Gramegna explains.

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One can observe that Luxembourg is not only attracting attention from China, but also direct investment.

Pierre Gramegna

A few weeks ago, Tuspark, a Chinese investment fund, chose Luxembourg as the EU hub for its innovation investment fund. A visit made by Pierre Gramegna two years ago is bearing fruit. “One can observe that Luxembourg is not only attracting attention from China, but also direct investment,” states the Minister of Finance and promises:

“We’re just at the beginning. More investment funds are being set up in Luxembourg through Chinese banks and Chinese asset managers. Green finance and Fintech, combined, will allow us to grow quite nicely in the future.