Xinhua Insight: Europe’s offshore yuan hubs carve out different roles

by Xinhua writer Lyu Dong

BEIJING, Sept. 23 (Greenpost) — The rise of several European offshore hubs for the Chinese currency, the renminbi or yuan, has led each to tap their respective strengths to help the “redback” realize its global ambitions.

China’s push for the globalization of its currency has spurred financial centers worldwide to become offshore yuan hubs. In Europe, London, Frankfurt and Luxembourg are among the financial centers in the region vying to help the yuan gain greater acceptance on the continent.

These European financial centers can leverage their unique strengths to help the yuan achieve global use in areas such as foreign exchange trading, settlement and investment, according to Nicolas Mackel, CEO of Luxembourg for Finance, an agency for financial sector development. Mackel is heading an 80-person delegation to visit Beijing, Shanghai and Shenzhen this week to promote Luxembourg as an offshore hub for the yuan.

“Every financial center is specialized in certain areas,” Mackel said.

Luxembourg is making the case that its status as Europe’s asset management hub positions it as an ideal choice for housing yuan-denominated investments, such as funds invested in China’s onshore capital markets and yuan-denominated dim-sum bonds listed on its exchange.

“London is the world’s capital for foreign exchange operation and clearly will also be the case for renminbi trading. Frankfurt, the financial center of Germany, China’s most important trading partner in Europe, will serve as the trade settlement [center] for Renminbi. Luxembourg is one of the world’s leaders for investment funds and international bond listings and the European continental hub for Chinese banks,” Mackel said on Monday.

The Chinese yuan already ranks as the world’s fifth most used currency in payment and second in trade financing, according to the SWIFT. Yet China also wants it to be used among investors and expects more central banks to hold the yuan as reserves.

With nearly 3.5 trillion euro in assets under management, Luxembourg has approved more than 20 mutual funds to invest in China’s stock market using the Shanghai-Hong Kong Stock Connect launched in November. However, yuan-denominated funds domiciled in Luxembourg remain few, currently worth 296 billion yuan.

In April, China granted the Grand Duchy a 50-billion-yuan RQFII quota, which allows foreign institutional investors to invest in China’s onshore capital market using the yuan.

China’s five largest state-owned lenders and China Merchants Bank have all established their European headquarters in Luxembourg, and five out of six Chinese asset managers who opted to launch investment funds in Europe via Hong Kong subsidiaries have chosen the country as a domicile for their funds.

China’s regulators allow foreign participation in the country’s capital markets through the Qualified Foreign Institutional Investors (QFII) scheme, RQFII and a program linking stock exchanges in Shanghai and Hong Kong.

But some foreign institutional investors argue that they face liquidity constraints and a lack of flexibility in investment quota allocation under these schemes. MSCI also cited these among reasons behind its decision to postpone the inclusion of China-listed shares in its widely tracked stock indices in June.

George Osborne, British Chancellor of the Exchequer, also announced this week during his trip to China a feasibility study into linking the London and Shanghai stock markets, potentially adding a new channel for offshore investors to expand their exposure to yuan-denominated securities.

Camille Thommes, director general of the Association of the Luxembourg Fund Industry, told Xinhua that the Luxembourg delegation was scheduled for meetings with China’s securities watchdog, the China Securities Regulatory Commission, and the State Administration of Foreign Exchange on Monday and Tuesday to discuss easing entry for offshore investors to China’s onshore capital market.

He added that interest in expanding exposure to Chinese securities is still high among Luxembourg-domiciled funds despite the volatilities in China’s stock market and the revaluation of the Chinese currency.

“I think these will not affect the fundamental interest in investing in the Chinese capital markets. There is still strong demand from investors who take long-term and positive views on Asian capital markets, specifically China,” Thommes said.

A survey of more than 500 Hong Kong-based investors conducted by Standard Chartered Bank between Aug. 14 to 22, when both China’s stock market and its currency underwent major corrections, also found that more than 70 percent of respondents are still willing to hold and even increase their holdings of yuan-denominated assets.

“Although volatility is certainly an aspect which has to be properly monitored, institutional investors in Europe or the U.S. taking a long term view will have to keep or even increase the weighting of China-related securities in their portfolio,” said Stephane Karolczuk, a lawyer with law firm Arendt & Medernach, which has advised the first Luxembourg mutual fund to use the Shanghai-Hong Kong Stock Connect in investing in Shanghai-traded stocks.

“QFII, RQFII and stock connect will remain very relevant to them.” Karolczuk said.

In addition to housing funds invested in China, Luxembourg’s stock exchange is also the largest listing market for yuan-denominated bonds in Europe and ranks third globally after Hong Kong and Singapore.

So far, issuers of yuan-denominated debts on the exchange are mostly multinational corporations seeking to raise offshore yuan to fund their operations in China, while Chinese issuers are mostly financial institutions. At 51.2 percent, European issuers account for the largest share of issuers that raise yuan at the exchange.

The advantage of listing yuan bonds in Luxembourg, according to Robert Scharfe, CEO of the Luxembourg Stock Exchange, is that its information transparency is unrivalled among dim-sum bond markets globally. Enditem

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