Paolo Balmas considers Chinese banking ambitions in Europe and what the country might hope to achieve with Legend’s recent acquisition of BIL
China is showing growing interest in Europe’s banking sector. Its banks and companies, both state-owned and private, are strongly projected to acquire not only foreign assets but also technological and financial know-how to meet the objectives of the country’s ambitious Five-Year Plan. The bigger aim is to shift from a production and export-based economy to a consumer and services-based one. Increasing its presence in European banking and financial networks will allow China to reach many different targets at once.
First, China will obtain financial expertise to implement its own advanced business services and develop its financial sector; at present, China depends on foreign companies’ services. Second, China will help European banks play a greater role part in financing One Belt, One Road (OBOR) infrastructure projects, and discover new, more efficient methods of cooperation among European and Chinese banks involved in the OBOR initiative. Third, China’s expansion into European banking will boost its RMB-internationalisation strategy. And fourth, China will be able to import those advanced services into its own market, which will help its banking system tackle the structural reforms needed to match the country’s national and international ambitions.
China started its acquisition campaign in Europe just after the 2008 global financial crisis, mainly focusing on the so-called PIIGS countries (Portugal, Ireland, Italy, Greece and Spain). Since then, China’s foreign direct investment has increased dramatically and spread to every sector throughout the EU, especially into more advanced countries, such as France, Germany, Italy and the UK.
More recently, however, China embarked on a new phase of its global expansion strategy with several acquisitions in European banking. In 2017, China’s HNA Group acquired a stake in Deutsche Bank, which made it the major stakeholder of the German bank, with an almost 10% share (although HNA had to sell back a part of it due to a liquidity situation). Fosun acquired a 24% stake in Portugal’s Millennium BCP. Zhejiang Geely Holding – a specialist in car and appliance manufacturing, with no experience in finance or banking – acquired 51.5% of Denmark’s Saxo Bank, which invests in financial technology and sells trading platforms in Europe. And Legend Holdings, owner of Lenovo and an IT and financial services specialist, signed the biggest takeover of a European bank by a Chinese firm – an almost 90% stake, valued at nearly €1.5 billion, in Banque Internationale à Luxembourg (BIL).
The case of Luxembourg
In September 2017, a few months after BIL was put onto the market by Precision Capital (an investment vehicle for members of Qatar’s royal family), Luxembourgish finance minister Pierre Gramegna confirmed the bank’s acquisition by Legend, operated through its Hong Kong subsidiary Beyond Leap. Though the deal has yet to be cleared by the European Central Bank or Luxembourg’s financial watchdog (the CSSF), the European Commission approved the acquisition in November 2017.
For Legend, this is a long-term investment that is unlikely to change BIL’s strategy – for the next 2-3 years, at least – as the bank is in the middle of its BIL2020 expansion programme. Neither is Legend likely to tinker with the organisation of the bank’s managing board or board of directors (which also includes Precision chief executive George Nasra) before 2020.
From then on, however, Legend is apt to set in motion its own strategy, which, in all likelihood, will include services to companies taking part in OBOR projects, strengthening China’s strategy of RMB internationalisation and widening Chinese financial networks in Europe as a whole – all of which represents more than potential growth for BIL. Further, Legend is likely to win BIL new Chinese customers interested in expanding their businesses in Europe. Luxembourg is a perfect gateway into Europe’s financial markets, with 40% of all FDI into the Continent funnelling through the Grand Duchy. Indeed, Chinese banks and investment funds already use Luxembourg as a base for strategic acquisitions in Central and Eastern European, not to mention Western Europe.
BIL’s acquisition serves as a double-layer expansion strategy for Legend – and for China in general. First, it is meant to reach out into Luxembourg’s national economic system, as BIL owns strategic assets within the country, as shown below:
Second, BIL has strong connections with Switzerland, Denmark and other European markets, in addition to assets in offshore jurisdictions, such as in Guernsey, to provide Legend with a well-established financial network. In other words, BIL is set to become a privileged financial facilitator for Chinese businesses interested in entering Luxembourg and European markets.
A changing environment
To develop a Strategic Partnership between the two powers, Chinese financial networks in Europe are growing, becoming more complex and increasing in scope. It happens as the European banking system undergoes an epochal change, pressured by new technologies, changes in the global financial environment, geopolitics and new rules in the form of the European Banking Union. Although the latter seems far from being realised, China, through the acquisition of BIL, will be able to follow, from the inside, the processes that slowly but surely bring European banks under a unique governing system.
As the banking system embarks on these great changes, it is wise to note that banks operate as ‘agents of change’ as well, influencing political and economic processes in turn. Many questions arise from China’s growing presence in the European financial system, with two of the most intriguing being how Chinese banks will influence these processes and to what extent. But more interesting for Luxembourg, apart from its hosting China’s major state-owned banks, is to understand which role BIL, under Chinese ownership, will play in the transformation of Europe’s financial environment.
Source link : https://www.luxtimes.lu/businessandfinance/china-european-banking-and-the-case-of-luxembourg/1329379.html
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Publish date : 2018-04-24 07:00:00
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