– Paolo Balmas and Sabine Dörry –
China’s global ambitions are being expressed, among others, by its huge infrastructure project ‘Belt and Road Initiative’ (BRI) and the internationalization of its currency, the renminbi (RMB). An element that serves both ambitions is the global expansion of Chinese banks. This paper examines the expansion strategy of Chinese state-owned commercial banks (SOCBs), mainly into Western Europe, which also form essential parts of their bank networks across the globe. Here, we pay particular attention to the anchoring of Chinese SOCBs in Luxembourg.
So far, little scholarly attention has been paid as to how and where China established the headquarters of these bank networks, and whether and why they have chosen the legal forms of branches or subsidiaries over the other. Surprisingly at first sight, Luxembourg’s international financial center hosts the largest number of headquarters of China’s banks in the European Union, and it funnels more than 40% of China’s foreign direct investments (FDI) into Europe.
This paper examines the organizational model of Chinese banks in Luxembourg to explain how (Chinese) global banking networks are constituted, and how these global banks’ expansion strategies interact with strategic entry points in Europe. The paper hence makes two major contributions:
First, and although this does not only apply to Chinese banks, all Chinese banks in Luxembourg are organized in a specific branch-subsidiary structure. In this setting, branches operate within Luxembourg’s borders, while subsidiaries are governing bodies from which a network of sub-branches across the EU is managed. Luxembourg’s specialization in the cross-border investment fund industry, its pool of experts, and expertise in utilizing Luxembourg’s suitable regulatory framework for foreign banks, attracted Chinese SOCBs to cluster. We argue that the (often overlooked) importance of the branch-subsidiary organization is one key contribution of the paper.
Second, we find that although Chinese banks have established similar headquarters in London, Luxembourg is now the leading center for cross-border investments with exposure to China’s securities markets and RMB bond listing. Luxembourg’s pre-eminence in these areas provides the foundation to potentially become a leading financial center of the future and a privileged entry point for Chinese public and private investors into Europe. However, we argue that Luxembourg may also serve as the reverse and become a similarly important entry point for foreign investors into China in the future.
To download full Working Paper (PDF): click here.
