Economy

How Luxembourg Could Cash In On Brexit

The tiny European country has improved its position as a post-Brexit business destination by reforming its fiscal rules and digital environment.

For Luxembourg, Brexit could spell opportunity
For Luxembourg, Brexit could spell opportunity
Pascale Braun

LUXEMBOURG — Plenty of people have reason to bemoan Britain's retreat from the European Union. But for others, Brexit could spell opportunity. And perhaps nowhere is that truer than in Luxembourg, with its booming financial center focused on investment funds management services and financial technology, or FinTech, as it's sometimes called.

The Brexit effect may, in fact, have already begun for the tiny Grand Duchy. In January, Japan's Rakuten Europe Bank launched its trading activities in Luxembourg. Two Chinese banks — China Everbright Bank and the Shanghai Pudong Development Bank — also have plans to set up shop in this nerve center of asset management in the EU. And in October, Britain's M&G Investments applied with the CSSF, the financial sector supervisor, for permission to start a fund distribution firm there.

This isn't to say that companies are stampeding their way into Luxembourg. But there does seem to be renewed international interest in the country as a financial center.

How exactly the Brexit plays out is still very much an open question. But the shifting status of London vis-à-vis the EU will no doubt push some companies toward the continent. Dozens of banks are thought to have already applied for their EU "work permits' with CSSF. And of all the possible landing sites, Luxembourg "is particularly well placed to offer practical solutions," says Tom Théobald, a deputy-head of Luxembourg for Finance (LFF), a public-private agency that develops Luxembourg's financial sector.

"London will keep its status as an international financial center," he adds. "But it will have to learn to work like the Swiss banks, with national seats and management platforms beyond its borders."

Enviable assets

Authorities and business leaders in Luxembourg were as shocked as anyone by the Brexit vote. But they were careful to say little in public that might upset its relations with London, Europe's top financial center. The City of London remains Luxembourg's first partner in fund transfers in both directions, while the Grand Duchy manages some 600 billion euros worth of British funds.

A paradise for finance? — Photo: Tristan Schmurr

Since Brexit, however, Luxembourg's finance minister, Pierre Gramegna, has become an unabashed promoter of his country's financial sector, repeating in London, the United States and China that Luxembourg would be the "natural choice" for financial actors looking for an EU operations base.

The sales pitch relies on some undeniable advantages. From the 1970s, Luxembourg began replacing steel as its big industry with finance, with an international outlook right from the start. It helps that its 549,000 citizens are taught French, German and English from early school age.

Unable to rely solely on the domestic market, Luxembourg's banks began specializing in logistical or back-office tasks for foreign, private and public investment firms, and in insurance and asset pricing.

This was the first European state in the late 1970s to host Islamic and then Chinese banks, and listed sukuks, or Sharia-compliant bonds, in 2002. It is established today as a financial bridge between the EU and China, being a member of the Asia Infrastructure Investment Bank, hosting China's top six banks and handling 69% of the country's investment funds in Europe.

Cited constantly in illegal financing and tax evasion scandals like Clearstream, the Panama Papers or LuxLeaks, the country has revised legislation to curb excessive tax maneuvering by firms that can harm its credibility as a financial center. And yet its lenient tax regime (its current corporate tax rate of 29.5% is set to fall to 26.5% by 2018) and a concentrated supply of skills is already attracting giants of online trading like Amazon Payments, Paypal and eBay.

From the 1970s, Luxembourg began replacing steel as its big industry with finance — Photo: Benh Lieu Song

Luxembourg has also lured startups like Bistamps which handles real-time payments for Bitcoin, as well as *Ripple, a venture-backed startup that uses the digital asset XRP in its transactions. The Grand Duchy was the first EU state, in fact, to authorize Bitcoin. The country's banks are also pioneers of creating "green" debt instruments to finance sustainable investments.

Fostering FinTech

The country is "accessible, open and multicultural," says Nasir Zubairi, a former financier who in November became CEO of the Luxembourg House of Financial Technology (LHoFT), a FinTech platform set to open a startup incubator in Luxembourg City this year.

A big symbol of the changes here is the Belval site near the French border, where former blast furnaces have been converted into a large innovation hub attracting researchers, students and business people from across the world. Some 30 startups backed by the Technoport incubator can access the resources of the massive, 18-floor Maison du Savoir, which Luxembourg University opened in Belval in 2014. Proximity provides those working here with direct access to French and German markets.

The United Kingdom has its own start-up accelerator under the aegis of the Bank of England, and has created regulations to favor FinTech. Brexit can either hamper its initiatives, or boost them by forcing the UK to integrate further into the European digital market. Brexit does not rule that out.

Luxembourg wants to strengthen its complementary role here, and "must continue to collaborate with the United Kingdom while sustaining FinTech activities in Europe," says David Diné, media relations project manager at the firm PwC Luxembourg. Brexit's threat to Luxembourg would be if Britain were to become a tax haven, a possibility cited recently in comments made by the chancellor of the exchequer, Philip Hammond.

Luxembourg reluctantly submitted to fiscal transparency rules in 2014, and would not like to see competition from the City in the realm of fund management, as that would be too strong. Luxembourg may be one of the world's safest place, but it still lacks London's financial clout and cachet.

Former French president Jacques Chirac, it's worth recalling, used to compare the tiny country to a French district or province. And yet that hasn't necessarily been a bad thing. Luxembourg's low profile, it turns out, has paid off quite nicely.

*Correction: An earlier version of this article incorrectly stated that Ripple uses Bitcoin.

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Future

How China Flipped From Tech Copycat To Tech Leader

Long perceived as a country chasing Western tech, China's business and technological innovations are now influencing the rest of the world. Still lagging on some fronts, the future is now up for grabs.

At the World Semiconductor Conference in Nanjing, China, on June 9

SIPA Asia/ZUMA
Emmanuel Grasland

BEIJING — China's tech tycoons have fallen out of favor: Jack Ma (Alibaba), Colin Huang (Pinduoduo), Richard Liu (Tencent) and Zhang Yiming (ByteDance) have all been pressured by Beijing to leave their jobs or step back from a public role. Their time may be coming to an end, but the legacy remains exceptional. Under their reign, China has become a veritable window to the global future of technology.

TikTok is the perfect example. Launched in 2016, the video messaging app has been downloaded over two billion times worldwide. It has passed the 100-million active user mark in the United States. Thanks to TikTok's success, ByteDance, its parent company, has reached an exceptional level of influence on the internet.


For a long time, the West viewed China's digital ecosystem as a cheap imitation of Silicon Valley. The European and American media described the giants of the Asian superpower as the "Chinese Google" or "Chinese Amazon." But the tables have turned.

No Western equivalent to WeChat

The Asian superpower has forged cutting-edge business models that do not exist elsewhere. It is impossible to find a Western equivalent to the WeChat super-app (1.2 billion users), which is used for shopping as much as for making a medical appointment or obtaining credit.

The flow of innovation is now changing direction.

The roles have actually reversed: In a recent article, Les Echos describes the California-based social network IRL, as a "WeChat of the Western world."

Grégory Boutté, digital and customer relations director at the multinational luxury group Kering, explains, "The Chinese digital ecosystem is incredibly different, and its speed of evolution is impressive. Above all, the flow of innovation is now changing direction."

This is illustrated by the recent creation of "live shopping" events in France, which are hosted by celebrities and taken from a concept already popular in China.

10,000 new startups per day

There is an explosion of this phenomenon in the digital sphere. Rachel Daydou, Partner & China General Manager of the consulting firm Fabernovel in Shanghai, says, "With Libra, Facebook is trying to create a financial entity based on social media, just as WeChat did with WeChat Pay. Facebook Shop looks suspiciously like WeChat's mini-programs. Amazon Live is inspired by Taobao Live and YouTube Shopping by Douyin, the Chinese equivalent of TikTok."

In China, it is possible to go to fully robotized restaurants or to give a panhandler some change via mobile payment. Your wallet is destined to be obsolete because your phone can read restaurant menus and pay for your meal via a QR Code.

The country uses shared mobile chargers the way Europeans use bicycles, and is already testing electric car battery swap stations to avoid 30 minutes of recharging time.

Michael David, chief omnichannel director at LVMH, says, "The Chinese ecosystem is permanently bubbling with innovation. About 10,000 start-ups are created every day in the country."

China is also the most advanced country in the electric car market. With 370 models at the end of 2020, it had an offering that was almost twice as large as Europe's, according to the International Energy Agency.

Photo of a phone's screen displaying the logo of \u200bChina's super-app WeChat

China's super-app WeChat

Omar Marques/SOPA Images/ZUMA

The whole market runs on tech

Luca de Meo, CEO of French automaker Renault, said in June that China is "ahead of Europe in many areas, whether it's electric cars, connectivity or autonomous driving. You have to be there to know what's going on."

As a market, China is also a source of technological inspiration for Western companies, a world leader in e-commerce, solar, mobile payments, digital currency and facial recognition. It has the largest 5G network, with more than one million antennas up and running, compared to 400,000 in Europe.

Self-driving cars offer an interesting point of divergence between China and the West.

Just take the number of connected devices (1.1 billion), the time spent on mobile (six hours per day) and, above all, the magnitude of data collected to deploy and improve artificial intelligence algorithms faster than in Europe or the United States.

The groundbreaking field of self-driving cars offers an interesting point of divergence between China and the West. Artificial intelligence guru Kai-Fu Lee explains that China believes that we should teach the highway to speak to the car, imagining new services and rethinking cities to avoid cars crossing pedestrians, while the West does not intend to go that far.

Still lagging in some key sectors

There are areas where China is still struggling, such as semiconductors. Despite a production increase of nearly 50% per year, the country produces less than 40% of the chips it consumes, according to official data. This dependence threatens its ambitions in artificial intelligence, telecoms and autonomous vehicles. Chinese manufacturers work with an engraving fineness of 28 nm or more, far from those of Intel, Samsung or TSMC. They are unable to produce processors for high-performance PCs.

China's aerospace industry is also lagging behind the West. There are also no Chinese players among the top 20 life science companies on the stock market and there are doubts surrounding the efficacy of Sinovac and Sinopharm's COVID-19 vaccines. As of 2019, the country files more patents per year than the U.S., but far fewer are converted into marketable products.

Beijing knows its weaknesses and is working to eliminate them. Adopted in March, the nation's 14th five-year plan calls for a 7% annual increase in R&D spending between now and 2025, compared with 12% under the previous plan. Big data aside, that is basic math anyone can understand.

https://www.lesechos.fr/idees-debats/editos-analyses/la-chine-est-desormais-une-fenetre-sur-notre-futur-1347064
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