Luxembourg, already the European hub of a number of Chinese groups, looks set to benefit from this new agreement in principle reached on 30 December 2020 (but still needing to be signed) after nearly 7 years difficult negotiations. Its scope is wide ranging and aims to create better market access for the companies on both sides but more particularly attempting to level the playing field for EU companies and is expected to give EU investors greater access to Chinese markets.
The cumulative EU FDI (Foreign Direct Investment) flows to China over the last 20 years have reached more than €140 billion. During the same time, for Chinese FDI into the EU the figure was almost €120 billion. Although Chinese FDI into the EU has grown rapidly, it is highly volatile and has declined over several years for a number of reasons. One of the important factors is that Chinese FDI into the EU still faces some restrictions and uncertainties in the EU market. EU FDI in China remains relatively modest though given the size and potential of the Chinese economy with its fast growing 1.4 billion consumer market. The new investment deal will help to a large extent to overcome these shortcomings and further promote China-EU two-way investment.
According to Alain Lam, partner at BDO, generally coordinating the business development activities firm wide, the CAI is a big deal for both Europe and China amidst global geopolitical influence repositioning. “The agreement, notably covering institutional openness measures, fair competition rules and sustainable development, intends to bring more investment and business lucrative opportunities for companies from both Europe and China,” he says.
The new investment deal should help accelerate Chinese business activity in Luxembourg over the coming years, according to Jingya Tian, BDO’s Senior Manager within the China Desk, qualified Chinese lawyer and native Chinese. She predicts a growing trend of more regulated structures in the future, as well as increased inbound investments from Europe into China (potentially via Luxembourg).
But both warn success for Luxembourg is by no means guaranteed. “Success factors will include achieving a good balance between better regulations and continuing to encourage new businesses, upholding a good professional ecosystem and maintaining value for money competitiveness.”
A bridge linking China, the EU and beyond
Since Bank of China established its first overseas branch in Luxembourg over 40 years ago, the Grand Duchy has become an important hub for a number of Chinese investors and institutions thanks to the strategic vision and active support of our political leaders through various organisations and significant contribution from the private sector players. According to China's Ministry of Commerce, more than 40% of Chinese investments in Europe are made via Luxembourg. Luxembourg’s strong ties to China have also benefited the local fund industry. In 2019, as much as 79.6% of European assets invested in China are Luxembourg funds, and 32.4% of global investment funds investing in China are Luxembourg-domiciled funds. China’s presence in Luxembourg has also grown steadily in recent years, with several Chinese banks, Private Equity firms, asset managers, logistics, infrastructure, energy and technology companies establishing operations in the country.
In 2019, as much as 79.6% of European assets invested in China are Luxembourg funds, and 32.4% of global investment funds investing in China are Luxembourg-domiciled funds.
Moreover, doing business in Europe continues to be a challenge for many Chinese firms. Mr Lam says the Luxembourg ecosystem, with its extensive solutions toolbox and easy access to experts such as professional accountants, lawyers, financial advisors and bankers, as well as a stable regulatory environment, have been key to Luxembourg’s success so far. But differences in local regulatory and professional standards between China and Europe, a lack of suitable due diligence process and proper planning have been detrimental to some investment transactions in the past.
The challenging market environment also presents an obstacle. Ms Tian says many Chinese firms still have to contend with foreign currency and outbound investment controls by the Chinese authorities. More recently, geopolitical pressures have led to several OECD countries applying stricter screening regimes with relation to the participation of foreign investors in domestic companies within strategic industries.
Therefore, having the right professional partners in Luxembourg with a suitable organisation and adequate resources can facilitate this all so important mutual understanding in order to properly navigate through the various challenges and administrative processes.
Get Lux-China specific advice
In order to better serve Chinese clients’ needs and address Luxembourg-Chinese specific business issues, BDO Luxembourg has established a China Desk at its Luxembourg office with Chinese-speaking professionals. They assist clients on a wide range of matters, including setting up and ongoing administration of Luxembourg-based companies, regulated or unregulated funds, in addition to corporate financial services, anti-money laundering compliance and regulatory services, HR, corporate tax and audit services.
Our large and reliable network enables us to act promptly and efficiently to Chinese clients in cross border cases.
BDO’s Luxembourg China Desk works closely with other China desks in BDO’s Europe network and it also has close collaboration with BDO China (立信会计师事务所), one of the market leaders in China, locally present with more than 30 offices and 12,000 staff. The wider BDO global network is one of the world’s largest accounting and advisory organisations, with 1,658 offices in 167 countries and employs more than 91,000 people generating in excess of €9 billion revenues in 2020.
“Our large and reliable network enables us to act promptly and efficiently to Chinese clients in cross border cases.” Ms Tian says, “Indeed.” Mr Lam says, “We strive for long-term partnerships and create genuine value for the Chinese clients to help them succeed in the Luxembourg and European market.”