Expertise in fund management, diverse investment options should prove attractive to managers

Though there has been much debate over the European destination for renminbi trade, there is little doubt that Luxembourg offers the best prospects for investors.

The size of the investment fund industry in Luxembourg and its ranking compared with other global peers is in sharp contrast to its geographical size as the smallest member state of the European Union.

Luxembourg is the second largest investment fund domicile in the world with more than 4,000 fund structures and 14,000 sub-funds. The total assets under management of these funds run into more than 2,400 billion euros. Only the US mutual fund industry is larger, but it focuses solely on the US domestic market.

Over the past 25 years, Luxembourg has developed considerably and offers several facilities to asset managers and banks keen on using Luxembourg investment funds to access the Chinese markets or offer yuan-denominated products.

Luxembourg's rich experience in fund distribution and structuring has created a huge global pool of clients and made it a major destination for international funds.

More importantly, Luxembourg also offers funds planning predictability due to its political, economic stability and AAA sovereign credit rating. Supportive government policies and the reactive, accessible regulators have helped the investment fund industry blossom.

It also has innovative fund products design, attractive and predictable taxation, and world-class infrastructure that supports investment structures across Asia.

As far as yuan business is concerned, it is expected that the asset management groups already present will leverage on their Luxembourg hub status to launch more RMB denominated share classes or use their QFII or RQFII quotas for direct investment in China. Additional fund management groups, mainly from Asia, will also look to Luxembourg to establish their European business.

Investments in China and exposure to RMB are already possible through various solutions in Luxembourg. The most relevant are the Undertaking for Collective Investments in Transferable Securities and Specialized Investment Funds.

UCITS are investment funds domiciled in a EU member state and organized under the UCITS Directive. Their main objective is to invest in transferable securities and/or other eligible liquid financial assets, namely money market instruments, units of UCIs, deposits with credit institutions and financial derivative instruments.

Since their inception in 1985, UCITS have become the only globally recognized investment fund brand offering a high level of protection to investors and investment fund cross-border marketability not only in the European Union (through a European passport) but also across other countries in Europe, Asia, the Middle East and South America.

In Hong Kong, the Luxembourg UCITS represent the majority of funds registered with the SFC for public offering. UCITS have been strengthened by their capacity to accompany the internationalization of the RMB.

Luxembourg UCITS have been authorized to invest up to 100 percent of their net assets in bonds traded on the Hong Kong Offshore RMB Bond market since 2011, and last year the Luxembourg supervisory authority has authorized UCITS using a RQFII quota to invest up to 100 percent of their net assets directly in China A Shares. UCITS can also increase their exposure to the Chinese markets through investments in other funds (e.g. Hong Kong domiciled funds) or eligible China access products.

Important talks are taking place on the acceptance of the China Interbank Bond Market as eligible investment for UCITS, which would open the bulk of the Chinese Fixed Income market to UCITS through the use of RQFII quota.

Meanwhile, SIFs are a specific category of funds that invest in accordance with the principle of risk spreading. Investment in SIFs is limited to well-informed investors who are able to adequately assess the risks associated with an investment in such a vehicle.

A number of SIF mainly accessing the China A-shares market exist and can be distributed to professional investors and high net worth individuals.

The Luxembourg government elected toward the end of last year has confirmed that the further improvement of trade and financial ties with China is among its key priorities.

The minister of finance and the prime minister are planning trips to China in the short term and Luxembourg already contributes largely to the progressive internationalization of the RMB through other channels, namely, the role of Clearstream as clearing hub and liquidity facilitator, the role of the Luxembourg Stock Exchange as the main European listing venue for RMB denominated bonds and last but not least the establishment of three major Chinese banks in Luxembourg.

The author is a partner of the Luxembourg-based law firm Elvinger, Hoss & Prussen, which has offices in Hong Kong.

( China Daily European Weekly 03/14/2014 page19)