Over the last decade, a combination of government support, the interest of the supervisory authority in the development of the fund location, and a major effort by the fund industry have given Luxembourg a leading role in investing in the People's Republic of China. Gast Juncker, a partner at the law firm of Elvinger Hoss Prussen in Luxembourg, comments.
Foreign investment is only allowed to a limited extent and can only be carried out in a state-controlled economy through a channel approved by the Chinese government. For the fund industry (and especially for UCITS), access through a quota system, direct access through the so-called "Stock Connect" programmes and direct access to the Chinese bond market are of particular importance.
Access to the Chinese capital market through investment quotas
The breakthrough in product design when using these investment quotas for UCITS came with the introduction of the RQFII (RMB Qualified Foreign Institutional Investor) quota system in 2011. This new channel facilitates the return of 'offshore' renminbi to China. In 2013, a Luxembourg UCITS was the first to be approved for a 100% direct investment in China. This is made possible by the fact that the investment channel allows the use of the same investments as QFII, but does not provide a lock-up period and also allows a daily return of capital from China without the need for currency exchange.
Interestingly, this investment channel was already available for use by Luxembourg funds before Luxembourg received its own RQFII quota. The Chinese authorities agreed that Luxembourg UCITS, which outsource the investment management to an external manager (either directly or through a management company), will use the RQFII quotas of the countries in which the investment managers are based. The classic example was the appointment of an investment manager in Hong Kong, which needed the Hong Kong RQFII quota to work in favour of the Luxembourg fund. At the present time, the use of the Luxembourg RQFII Quota, which was granted in 2015, also makes it possible for Luxemburger verwaltungsgesellschaften (management companies or mancos) to outsource the management of a UCITS through the use of their own RQFII quotas to investment managers who do not have their own RQFII quota feature.
Direct access to the Chinese capital market
Direct access is now possible for Luxembourg UCITS via the so-called StockConnect schemes. In this context, the fund is allowed to invest through the stock exchange in Hong Kong in most of the shares listed in Shanghai and Shenzhen. There are no quotas per asset manager and the set limits for trading via StockConnect (globally for all investors and daily) have not caused any problems so far. As with the previously described investment channels, StockConnect Luxembourg has also taken the lead in the UCITS sector.
However, the interest of investors and asset managers is also heavily focused on Chinese bonds. The Central Bank of China and the supervisory authority have been granting direct access to the China Interbank Bond Market since 2016. At the end of the year, the political decision was reached that a BondConnect between Hong Kong and China should be established parallel to StockConnect.
Luxembourg as a hub for Chinese asset managers
Along with these developments, numerous Chinese investment managers (in addition to the Chinese banks) have opted for Luxembourg as a location for the launch of their international investment fund platform. ICBC, Bank of China, Harvest, Fullgoal, China Asset Management and others have all laid the foundations for their international development in Luxembourg UCITS. These funds (mainly UCITS) are intended to provide products to international investors for access to the Chinese market. The local presence and the knowledge of the Chinese market on the part of these asset managers and banks are, of course, their main selling-points. At the same time, these platforms are ready to provide Chinese investors with access to the international capital markets once the strict controls on capital flows from China are eased or abolished.
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