The Evolving China-Luxembourg Partnership in Finance and Sustainability

On Monday, July 22nd, the China Cultural Center in Luxembourg launched its inaugural discussion on "Global Opportunities in Advancing China's Reform in the New Era." The event was a collaborative effort between China Media Group Europe (CMG Europe) and the Chinese Embassy in Luxembourg, with backing from the China-Luxembourg Chamber of Commerce, the China Chamber of Commerce to the EU, the China Cultural Center in Luxembourg, and EU Reporter[1] .

As is reported in the recent article of the EU Reporter[2]  the Chinese Ambassador to Luxembourg Hua Hua Ning highlighted the remarkable progress and numerous "firsts" in the cooperation between China and Luxembourg. Luxembourg was the first European country to join the Asian Infrastructure Investment Bank (AIIB) and among the first EU nations to sign a Belt and Road cooperation agreement with China. Notable speakers included Jean-Marc Goy, Chairman of the Association of the Luxembourg Fund Industry (ALFI), and Dick Roche, former Irish Minister for European Affairs and Environment. The dialogue saw participation from nearly 100 representatives across political and business sectors, think tanks, media, and university students from both China and Europe.

This meeting was a natural progression of the long-established relationship between Luxembourg and China. For instance, just last month, Vice Foreign Minister Deng Li attended the National Day Reception hosted by the Embassy of Luxembourg in China, as reported by Xinhua News[3] . During this meeting, Chinese Vice Premier Ding Xuexiang and Luxembourg's Deputy Prime Minister Xavier Bettel agreed to strengthen cooperation under the Belt and Road Initiative (BRI). The two leaders made these remarks while attending the second Zhengzhou-Luxembourg "Air Silk Road" Forum for International Cooperation on June 20th. Vice Premier Ding, who is also a member of the Standing Committee of the Political Bureau of the Communist Party of China Central Committee, recalled that in June 2017, Chinese President Xi Jinping proposed the creation of the "Air Silk Road" between Zhengzhou and Luxembourg. The chair's statement at the third Belt and Road Forum for International Cooperation in October 2023 announced the second Zhengzhou-Luxembourg "Air Silk Road" International Cooperation Forum. Ding emphasised that this forum is a concrete step toward implementing the consensus reached by the leaders of both countries to deepen Belt and Road cooperation, underscoring its significant importance, as reported by Xinhua News[4] .

According to a report[5]  by the International Financial Law Review (IFL), these developments highlight the enduring and robust relationship between Luxembourg and China. Since the establishment of the Bank of China's overseas subsidiary in Luxembourg in 1979, the grand duchy has become a crucial entry point to the EU for Chinese financial institutions. Over the years, numerous Chinese banks have set up their European hubs in Luxembourg, which now hosts several overseas subsidiaries of Chinese banks. These banks have expanded their activities beyond traditional banking services to include capital market operations and asset management. They play an active role in financing mergers and acquisitions (M&A) initiated by Chinese investors, thereby enhancing cross-border investments between Europe and China. Additionally, in 2011, the Luxembourg Stock Exchange (LuxSE) listed the first offshore renminbi (RMB) bonds in Europe, known as dim sum bonds. This milestone marked the start of a strong financial exchange between China and Luxembourg, with LuxSE now being a favoured platform for Chinese investors seeking to list RMB in Continental Europe. Consequently, Luxembourg has emerged as a leading hub within the EU for financial services related to the Chinese market and one of the largest renminbi centers outside China.

Investments in Luxembourg are prevalent, with Chinese investments significantly contributing to the growth of Luxembourg's markets. According to the IFL report[6] , there is generally no specific pre-approval process for M&A transactions in Luxembourg, though such deals may require approval from the relevant Luxembourg authority.

The EU is leading the way in establishing a legal framework for ESG (Environmental, Social, and Governance) aspects, sustainable investments, and related disclosure obligations, which indirectly impacts the M&A market and the strategies of Chinese outbound investments in Europe. Notable initiatives include the implementation of Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector[7]  and Regulation (EU) 2020/852 on establishing a framework to facilitate sustainable investment[8] . Additionally, the Corporate Sustainability Reporting Directive[9]  (CSRD), which came into force in January 2023, mandates that large companies and listed SMEs operating in the EU disclose information on their ESG performance in their annual financial reports. This directive also applies to non-EU companies with significant activities in the EU. The first affected companies must comply with the new rules starting from the financial year 2024 and publish their reports in 2025.

Additionally, after extensive discussions, the Council of the EU approved a renewed proposal for a Corporate Sustainability Due Diligence Directive[10]  (CSDDD) on March 15, 2024, which was subsequently adopted by the European Parliament on April 24, 2024. The CSDDD mandates that large EU and non-EU companies with significant EU activities disclose actual and potential human rights and environmental adverse impacts of their operations and value chains, including those of their subsidiaries. The directive must now receive formal approval from the Council and be published in the EU Official Journal, taking effect twenty days after publication. Member States will have two years to incorporate the new rules into their national laws.

Since the 'Belt and Road Initiative' was incorporated into the Constitution of China in 2017, the Chinese government has increasingly promoted sustainable investment practices and prioritised ESG factors in overseas investments. In 2021, nearly a third of Chinese foreign direct investment (FDI) consisted of greenfield investments. After years of rapid growth, in 2022, the volume of Chinese greenfield investments in Europe (€4.5 billion) surpassed that of M&A transactions (€3.4 billion) for the first time, as reported by the IFLR report[11] . Greenfield investments, particularly in the energy, battery plants, and automotive sectors, now dominate China’s FDI in Europe and are expected to continue growing.

The implementation of robust ESG policies and strategies by target companies can attract more green and ESG-standardised investments from Chinese investors. As ESG factors become increasingly significant in investment decision-making, Chinese investors are encouraged to enhance their competitiveness and seize emerging opportunities in Luxembourg and the broader EU market by developing expertise in ESG topics and aligning their investments with sustainability goals. This strategic alignment would not only strengthen their position in the EU market but also demonstrate a commitment to long-term value creation and responsible investment principles.

The evolving partnership between China and Luxembourg reflects a strong economic and strategic alliance built over decades. From the Bank of China's early presence in Luxembourg to recent Belt and Road initiatives, both nations have shown a commitment to deepening financial and commercial ties.

Key developments, such as sustainable investment practices and ESG compliance, highlight a forward-thinking approach. Luxembourg’s role as a crucial EU hub for Chinese financial services and the renminbi market solidifies its position as a gateway for Chinese investments in Europe.

By focusing on sustainable investments and ESG standards, China and Luxembourg are poised to attract more green investments, fostering long-term value and responsible investment practices. This strategic alignment not only strengthens bilateral relations but also contributes to global economic stability and growth, paving the way for future opportunities and enhanced cooperation.

Author: Lucy van Eck

Editor: Jonathan Xu