The grand expanse of China may seem a million miles from little Luxembourg, but the geographical giant and the teeny European hub have put their heads together over the last few years to facilitate extra growth in a challenging market, and it seems to be working.
The grand expanse of China may seem a million miles from little Luxembourg, but the geographical giant and the teeny European hub have put their heads together over the last few years to facilitate extra growth in a challenging market, and it seems to be working.
In November 2014, the long-awaited Shanghai-Hong Kong Stock Connect finally whirred in to action, allowing investors all over the world access to mainland Chinese stocks from the Hong Kong Exchange.
Meanwhile, Luxembourg saw a record-breaking 2014 in terms of growth, breaking the €3 trillion mark in assets under management for the first time in September, and seeing in the new year with a grand total of €3.1 trillion.
The Association of the Luxembourg Funds Industry (ALFI) also put some quality time in to its relationship with China.
In July 2014, ALFI signed an historic memorandum of understanding with the Asset Management Association of China (AMAC). The partnership had three main objectives: making a commitment to implementing joint programmes; offering mutual assistance and exchange of information, specifically regarding regulation and investor protection; and to create opportunities for mutual membership referral and events for professional developments.
The memorandum arguably simply put an official stamp on a long-running partnership between Luxembourg and the Asian markets, one that has seen a heightened presence and increasing interest. In 2014, ALFI’s financial seminars in Taipei, Tokyo and Hong Kong drew 180, 275 and an enormous 475 attendees, respectively.
Camille Thommes, director general at ALFI, says: “Luxembourg UCITS have been investing for quite some time in the mainland China market and we have a very positive relationship with AMAC.”
“There is willingness from the Asian market to have an active dialogue with the regulators here in Europe, like the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg, who can explain in much more detail how our system works, and who can provide the necessary reassurance to allow funds to go ahead.”
The partnership has not only strengthened the relationship, it has paved the way for Luxembourg domiciled funds to take advantage of the new Shanghai-Hong Kong Stock Connect. The first ever UCITS to go live on the programme sprung up from Luxembourg, and was approved in December 2014.
When the memorandum of understanding was signed, ALFI chairman Marc Saluzzi said: “In the future, as Chinese asset managers may wish to extend their activity outside of China, Luxembourg will constitute an ideal gateway into and beyond Europe. Luxembourg is indeed the leading worldwide domicile for cross-border asset management activities.”
With Luxembourg already distributing UCITS across 70 countries, it may well turn out to be an ideal spot to launch RMB-denominated funds in to the European market, and to distribute them around the world.
As well as a boost for Luxembourg, this could speed up the internationalisation of the renminbi.
China’s qualified foreign institutional investor (QFII) scheme is still a relatively recent development, launching in 2002, and China didn’t start trading with other currencies until 2010. Even after that things didn’t pick up too quickly. The UK became the first western country to issue a government bond denominated in renminbi in 2014.
It may not be a direct correlation, but since the launch of the stock connect, and the subsequent expansion of the Chinese markets, the Renminbi has leapt to the top-five currencies used for global payments.
According to SWIFT, RMB jumped from thirteenth on the list in January 2013, with 0.63 percent of the worlds payments, to fifth less than two years later. In December 2014, RMB accounted for 2.17 percent of the world’s payments, behind only the Japanese yen with 2.69 percent, the British pound with 7.29 percent, and the euro and US dollar with 28.3 percent and 44.64 percent, respectively.
It’s a long-awaited milestone in the internationalisation of the RMB, with SWIFT’s head of banking markets, Wim Raymaekers, saying the news “confirms its transition from an ‘emerging’ to a ‘business as usual’ payment currency”.
With the two markets mirroring each other in growth, Luxembourg UCITS have already increased investment in mainland China markets, and since the RMB QFII quota was expanded in 2013, many have also started to invest in the Chinese equity markets.
As the Luxembourg market continues to grow, ALFI is setting its sights on new markets, including China. Luxembourg will take advantage of its existing position as an international renminbi centre to remain at the forefront of the internationalisation of the renminbi, while fuelling the gradual opening of the Chinese markets through the stock connect programme.
ALFI’s Thommes explains that while entry to the Chinese market is beneficial to Luxembourg, the emerging market could also learn one or two things from Europe’s leading fund domicile.
“We provide training, we provide experts to report on development strands on certain important aspects in the management and administration of funds, and we have even offered training to some of the regulators in the region.”
“We are well respected and well recognised there, and we are very keen to support it in its development, providing our best expert advice if they need it.”
According to Thommes, while European, and worldwide, investors can take advantage of the Chinese capital markets, the liberalisation of those markets can only make the RMB stronger. But that’s not to say that connecting to the programme been an easy ride.
“Obviously the stock connect is an important initiative and one cannot expect it to work perfectly from day one, but we have been working very closely with the authorities, and with the help of our experts, we will get there,” he says.
“There are still some technical and operational issues that need to be fixed, but the stock exchange authorities, both in Hong Kong and mainland China, are open to get feedback from the players entering the scheme.”
The problems haven’t just been practical ones, even if the system is perfectly oiled and running smoothly, there is still the arguably larger hurdles of gaining the trust of investors and making sure that the service is running properly.
Thommes says: “Both the funds investing and the service providers need to make sure that they comply with European regulation when it comes to aspects of delivery versus payment, ownership rights and enforcement rights. These are the issues that we have been discussing over the last couple of months, to find ways to give that comfort and certainty to investors.”
“There’s a clear willingness from Hong Kong and China to address those issues, and a lot of firms are already taking the feedback on board. There is definitely a mutual interest to make the system work smoothly from an operational, legal and technical standpoint.”
That said, nothing that changes the state of play so drastically is likely to come in without at least a little hitch, and Saluzzi maintains that this is a healthy transition period that is necessary to smooth out the creases in the road.
“It’s a very normal process to go through when you set up this kind of platform,” he says.
“When two regions come together the operational conditions and legal requirements are not the same, so you have to go through the practical implementation details and you have to work out some of the frictions between market participants and the platform. That’s normal, and it’s nothing to be concerned about.”
Once these teething problems are overcome, ALFI anticipates a growth spurt in the scheme, evolution in the system and a generally increased interest in establishing UCITS funds in Asia.
“There is clear interest from Asia, especially China, to use that scheme to offer investors a direct entrance to the Chinese equity markets,” says Thommes.
“They are thinking about expanding the scheme to other instruments, instruments that are pure equities, and that’s a clear demonstration of the opening up and further globalisation of the Chinese capital markets.”
Although there may be glitches in the system now, it’s important to remember that the programme has not been up and running for six months yet. Service providers have muddled through successfully and many have already found their own solutions while the powers that be are working on official fixes.
The Shanghai and Hong Kong stock exchanges are already thinking about a second-phase rollout of the scheme. They’re willing to accept their shortcomings and are setting them right as quickly as possible.
As the Chinese market opens up to investment from Europe, it’s also allowing in advisors, those who have a little more experience in the field and understand Europe and its smorgasbord of recent regulation, and that are wiling to help, whether that’s out of empathy or the promise of mutual gain.
Somehow, Luxembourg seems to have become a key ally in the Shanghai-Hong Kong Stock Connect’s relationship with the western jursidictions, pioneering the new scheme and embracing the risks that come with it.
It may be an unlikely friendship, but, as Thommes said, it’s a positive one. Mutually supportive, patient and progressive, and perhaps, one that’s revolutionising the funds landscape as we know it.
