As WiC reported in its recent Focus Issue, Ready for the RMB, London has high hopes of becoming a hub for the Chinese currency in Europe. But does it already have a battle on its hands, after suggestions in the media that at least one Chinese bank is routing three times more business through Luxembourg than the British capital, and that others may be planning to switch more of their European operations to the Grand Duchy?
Luxembourg has also attracted a number of other Chinese corporations and already serves as a trusted conduit for a major share of the Chinese direct investment arriving in the European Union. Since 2011, its stock exchange has also been host to a number of renminbi-denominated bond listings, including those of Air Liquide, the French industrial gas giant.
Keen to deepen ties further, a major trade mission will visit five Chinese cities at the end of November, led by Prince Guillaume, Luxembourg’s Hereditary Grand Duke, and Etienne Schneider, its Minister for Economy and Foreign Trade.
To understand more about Chinese interest in Luxembourg, WiC talked to Nigel H Fielding, Chief Executive Officer of HSBC in Luxembourg, and Nicolas Mackel, the Executive Director of Luxembourg’s Trade and Investment Office in China, as well as its Consul General in Shanghai.
Have many Chinese companies heard of Luxembourg?
Nicolas Mackel: Of course they have! In fact, I’ve worked in different roles for Luxembourg in various countries and the Chinese seem to know more about us than many others. In some countries, we draw a blank or might be confused with Liechtenstein, but many of the Chinese clients whom I speak to have little problem finding us on the map.
Nigel Fielding: I agree with the Consul General on this. Awareness seems good. For instance, when I was in Shanghai earlier this year, people seemed to know about Luxembourg, more so perhaps than in some of the other parts of Asia that I’ve visited. Maybe that’s because of the World Expo in Shanghai two years ago. Apparently the Luxembourg Pavilion welcomed more than seven million visitors.
So what kind of Chinese companies are coming to Luxembourg?
Mackel: A wide range of Chinese companies are now following the ‘Going Out’ strategy and looking to establish a presence in Europe. But a sweet spot for us is firms that are looking to buy European technology and brands. Purchasers of patents and intellectual property are a good fit: for instance, we are host to holding companies for some of the Chinese solar firms who have acquired technology assets in other European markets. Other leading companies like China Investment Corporation, Sinopec and CNOOC also have a presence in Luxembourg through which they manage some of their investments in Europe.
Fielding: We’re seeing three main categories of Chinese client. One group is what I would call those operating in core industries, like commodities, mining and steel. Their primary motivation right now is sourcing product from Europe or elsewhere. They are less focused on the sales side, although that may change in future.
Then there are firms in what could loosely be termed the tech sector – companies in electronics, computers and devices who may be sourcing materials or components but who also want to sell their own goods into the wider world. So they might also have sales operations in other European markets, and potentially even some production, but they are using Luxembourg as a hub to facilitate this.
The third sector is logistics and support – companies in transportation, shipping and freight forwarding. Here Chinese firms are coming to Luxembourg to support the expanding supply chain between China and Europe.
Luxembourg is a logistics hub too? Surely other airports in Europe offer more connectivity into China?
Fielding: True, there are bigger airports. But often the competition for landing slots is more intense, making timetables more congested and probably putting up airport charges too. One of the beauties of Luxembourg’s airport is that it has capacity and a focus on cargo operations. It is also home to Cargolux, Europe’s largest all-cargo airline, and once Chinese goods arrive in the country they can all be moved quickly by road or rail to other parts of Europe.
Additionally, Luxembourg has no requirement to pre-finance VAT, which delivers working capital advantages.
Luxembourg seems to get a major share of Chinese investment into Europe. Why is it such an attractive option?
Mackel: A large share of Chinese investment arriving in Europe is routed through Luxembourg because we provide an excellent platform for other markets. We’re geared up for international business and we have a legal and regulatory framework designed to support business creation. The Chinese see the opportunities just as much as any other nationality of investor.
Of course, the competitive tax environment is definitely a factor. But our pragmatic approach to bureaucracy makes setting up a new business a rapid process. We’re a small country so it’s also possible to reach out to the top echelons of government fairly easily. This personal touch, it appeals to the Chinese.
Additionally, we’re located at the heart of Europe but we’re not one of China’s big trading partners or competitors. That means it’s much less likely we’ll get caught up in some kind of commercial or diplomatic dispute, so the prospects for a stable relationship are excellent. Fortunately our public finances are also in much better shape than other European countries, which gives overseas investors more confidence that our tax regime is going to remain stable in the years ahead. Investors want certainty – the Chinese are no different.
Fielding: Yes, Luxembourg’s mentality in wanting to attract foreign capital is very important. The domestic economy is small so we have to attract the international companies. And it works well: while larger countries often have to think more about the domestic impact of policy changes, Luxembourg doesn’t need to hesitate in quite the same way.
How do Chinese companies express an interest in coming to Luxembourg?
Fielding: Chinese clients still make up a relatively small share of our total corporate client base but what’s been exciting this year is that a third of our pipeline of new business is from Asia. And half of that comes from what I would term Greater China: China, Hong Kong and Taiwan.
The clients come to us through a variety of channels. The smallest number is pure “walk-in” business and we still get business from this type of customer. Then there are the introductions from local advisers like law firms, usually when their Chinese clients need banking services. But by far our biggest source of new business is via HSBC’s own relationship managers and sales teams working in China and Hong Kong. We liaise closely with them to promote Luxembourg, so that potential clients are aware of their options for coming here. In fact, this is one of HSBC’s major strengths: the ability to help clients connect into the different markets in which we have a presence.
Mackel: From a trade development perspective, we’re always keen to talk to the larger companies. Huawei is already one of the largest Chinese presences in Luxembourg and we have a number of Chinese companies choosing Luxembourg as a location to manage their European clients and suppliers, such as Shanghai Automotive Industry Corporation.
But we’re also looking closely at the next tier of firms, the up-and-coming Chinese companies that might be starting out in selling to Europe or have only just begun to consider investing there.
So the tax benefits in setting up in Luxembourg are a major draw for Chinese firms?
Mackel: Luxembourg’s double taxation agreement with Hong Kong is important. It offers a range of benefits, especially for the treatment of dividends, which can be exempt from corporate income taxes as long as certain conditions are met.
And low VAT rates too? Companies like Amazon and Skype have set up in Luxembourg. Have Chinese e-commerce firms expressed interest?
Mackel: It is true that we have the lowest VAT rates in Europe, at the bottom end of the range stipulated by European Union law, and it has been one of the factors in attracting e-commerce firms to come here. But the rules are changing at the start of 2015 and consumers in Europe will pay VAT based on where they purchase their goods, not where the seller is domiciled. Even so, Luxembourg will continue to attract e-commerce firms, primarily because of our superb communications and technology infrastructure. This is a by-product of our development as a financial services hub, with the benefits now spilling over into other sectors too.
In terms of attracting Chinese e-commerce companies: yes, we do talk to them but it is still at a fairly early stage. At the moment, most of their commercial focus is domestic and they don’t have the same presence in Europe or other international markets. Of course, that may change in future. The e-commerce industry is always changing very rapidly, after all.
How about as a financial hub? The Chinese banks are coming to Luxembourg?
Mackel: ICBC established itself in Luxembourg in the 1990s but decided to headquarter their European operations in Luxembourg last year, and Bank of China has been present in the country since 1979 and is running most of its European network from Luxembourg.
In August this year, China Construction Bank also announced that it is setting up its European headquarters in Luxembourg.
What we’re noticing is that Chinese companies seem more comfortable following in the wake of their peers. This cluster effect has been important in encouraging wider Chinese interest in Luxembourg as a financial centre, as other financial services firm follow the example of the Chinese pioneers. Of course, once the banks are here Luxembourg also becomes a more obvious location for more of their corporate clientele.
Fielding: As a financial hub, Luxembourg is already the world’s leading location for international investment funds, with its UCITS and SIF fund structures now preferred by asset managers around the world. Of course, HSBC is already very active, including launching a Luxembourg-domiciled renminbi bond fund for investors.
As Chinese banks and asset managers look to market more of their own funds to investors worldwide, we expect Luxembourg to become a preferred jurisdiction for them too, though it’s still early in the process. The asset managers and other fund-raising entities in China are still very focused on the domestic market, which is not yet fully open for selling foreign funds and I’m not aware of any Chinese enterprises launching funds out of Luxembourg yet.
But looking ahead, there is a huge opportunity. As the Chinese market starts to open up more, there will be plenty of scope for providing fund management products to the Chinese market, from international and domestic players.
Here at HSBC we are also seeing the personal banking opportunity grow too. As Chinese companies start to send more of their executives overseas, many want banking advice and services. For instance, an executive who works for a Chinese company here contacted us very recently wanting banking services in the UK, where they had just sent their son to school.
We expect to handle many similar enquiries in future because of HSBC’s advantage in operating in so many key markets.
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