The Financial Silk Road

The role of Luxembourg in China’s early opening

– In November 1972, few months after the historic meeting between President Nixon and President Mao (21-28 February), the Grand Duchy of Luxembourg established diplomatic relations with the People’s Republic of China. Only a few years later, in September 1979, Grand Duke Jean of Luxembourg made an official visit to China, where he met with President Deng. The encounter was facilitated by a Luxembourgish engineer, Adolphe Franck, remembered in Luxembourg as a fervent Maoist. Franck had patented a few advanced railway technologies, which he gifted to China.

The same year, economic ties between China and Luxembourg were solidified by the opening of a branch of the Bank of China (BOC) in Luxembourg. At the time, the Grand Duchy was viewed as a more discreet and private international financial centre compared to major European centres such as London (where the BOC was already present, see below), Paris and Frankfurt. Luxembourg offered an environment where international transactions and relationships could be conducted with a high degree of confidentiality. During the Cold War, Luxembourg hosted both American and Soviet banks, underscoring its neutrality and discretion in global finance.

It is therefore unsurprising that China chose Luxembourg as the gateway for its initial steps into the international financial system. Equally unsurprising is the fact that this European branch of the BOC—later to become a cornerstone of Chinese financial presence in Europe and a precursor to subsequent expansions—has often been overlooked by historians of China’s banking system and by scholars of international Chinese finance. Luxembourg appears to have retained its rare capacity for discretion.

The BOC has evolved from institutions originally established with the financial reforms initiated in the final years of the Qing dynasty. It was the first central bank in China to operate with mixed capital, both public and private. The People’s Republic of China, after the Maoist Revolution, inherited the BOC from the Nationalist republican government, which was Beijing’s rival regime. Under President Mao, the BOC operated as part of the People’s Bank of China, China’s central bank.

The BOC of the early People’s Republic was a very different institution compared to its original form. Successive governments have passed down, from the late nineteenth century to the founding of the People’s Republic in 1949, the network of experts and branches across various regions of China, including few overseas branches.

The former Bank of China, the Nationalist government’s central bank, had already established its presence in London as early as 1929—the first Chinese bank to open abroad—under Chiang Kaishek’s government. This branch was closed during the Maoist revolution but later reopened in the 1950s as a branch of the new central bank, with deposits amounting to the equivalent of approximately £12 million. At the time, it remained the only active BOC branch outside of Asia, where the bank maintained a presence in countries such as India, Singapore, Malaysia, and Indonesia.

In the 1930s, the BOC had also opened an agency in New York. However, following the end of the civil war, this agency was absorbed by the International Commercial Bank of China (now known as Mega Bank), headquartered in Taipei, Taiwan, and under the control of the then Nationalist government. The BOC did not reestablish a presence in New York until 1981, two years after opening its branch in Luxembourg.

In 1978, with Deng Xiaoping’s economic reforms, the BOC was separated from the central bank and became one of the country’s “Big Four” state-owned commercial banks, alongside the Agricultural Bank of China, the Industrial and Commercial Bank of China, and the China Construction Bank. The BOC was tasked with managing China’s international financial operations. Though this was not its sole function, it clearly assumed a pivotal role in China’s economic expansion, a role it continues to play today. As well, it assumed a critical role in the emergence of what we now call the Financial Silk Road.

From the very outset of China’s return to the international stage, the country’s financial footprint abroad was shaped by the global expansion of the BOC. In Europe, this expansion followed two distinct axes: the Luxembourg and London branches. Since the 1990s, Luxembourg has become the main hub for Chinese banking networks operating within the European Union, while London serves as the headquarters for those operating in the UK. This bifurcation remains in place to this day, primarily due to regulatory differences between the United Kingdom and continental Europe in the governance of financial institutions.

In a sense, this organizational distinction across jurisdictions later proved advantageous. During the institutional disruptions brought about by Brexit, Chinese financial institutions—thanks to their already compartmentalized network—were relatively well-positioned compared to others. Many international banks, whose operations spanned both sides of the Channel, were compelled to restructure. With the loss of bank passporting rights in the UK, some were forced to convert branches into fully licensed subsidiaries. Chinese banks, by contrast, had already established this dual-track model, allowing them to adapt more smoothly to the post-Brexit financial landscape.

Due to their operational and functional significance, both financial centres of London and Luxembourg represent crucial strategic nodes along the Financial Silk Road, a topic we will explore in greater depth in the future.