Keywords

Introduction

Be unhurried to enter opponent’s territory. (One of the Ten Golden Rules of Wéiqi)

Applying the concept of geoeconomics, this book chapter mobilizes empirical insights to disentangle how various economic means are employed by, through and between nation states in the pursuit of strategic goals (Scholvin & Wigell, 2018). Though still a fuzzy concept, we apply geoeconomics as a continuation of geopolitics, that is, as a foreign policy practice à la US foreign affairs advisors like Kissinger, Brzezinski and others (see Luttwak, 1990; Søilen, 2010). Our case study links the seemingly uneven, yet interdependent, relationship between China and Luxembourg with the realm of international finance via large Chinese state-owned banks as important, but analytically neglected actors. China is a large territorial country that ascribes to power politics through—as we argue—the expansion of its large state-owned banks, while Luxembourg is a microstate that forms an integral part of the European Union (EU) and which some observers call a financial minnow super-power (Laulajainen, 2003) that is punching well above its economic and political weight.

Finance is an industry that has gained disproportionate power over other industries during the era of financial capitalism and financialization (Dörry, 2022), therefore suggesting that a limited number of international financial centres (IFC), i.e. the production sites of finance, also wield a certain degree of power over other territories, sovereign powers and actor groups. Luxembourg is an example of such an IFC, and large Chinese state-owned banks that anchor in Luxembourg are the agents of change in the spotlight of our empirically informed analysis. Luxembourg is a highly sophisticated IFC that manages and leverages its economic power, which, to a certain degree, is simply “borrowed” economic power. Against this background, an interesting question presents itself, namely: how (successful) are geoeconomic strategies, when the large majority of the most influential financial firms in Luxembourg is of foreign origin, e.g. from China, and quintessentially governed by external interests?

The concept of geoeconomics, here applied in a narrow, instrumental sense (Wigell et al., 2019), helps us unpack measures, means and ends between both Luxembourg and China, in order to systematize their respective influence and impact on their future relationship, and beyond. In this regard, the prefix ‘geo’ in the conceptualization of geoeconomics is of distinct importance as we illustrate in the next section. Although the term geoeconomics is relatively well established in the disciplinary canon of (mainstream) International Relations (IR), its analytical power as a concept is somewhat fuzzy, and the concept sits uncomfortably with that of geopolitics. Recent attempts sought to clarify and tease out the essences of geoeconomics as a concept for analyzing contemporary structures. While some scholars suggest a deliberately broad definition to encompass a range of diverse and partly overlapping areas (Moisio, 2018, 2019; Sparke, 2004, 2018), e.g. ‘borderless economic zones, strategic economic instruments of foreign policy, both neoliberalism and economic nationalism, and so forth’ (Vihma, 2018b, p. 48), others disagree with such an ‘overly extensive’ approach that ultimately ‘lose[s] its analytical power’ (Vihma, 2018b, p. 49). Instead, they favour a more ‘instrumental and hegemonic’ (ibid.) application of geoeconomics. In this chapter, we follow this latter suggestion and propose to understand geoeconomics as economic activity of ‘a more subtle means [than military power] for seeking relative gains, with less risk of major counteractions that could prove costly in a situation of interdependence’ (Wigell & Vihma, 2016, p. 605; cf. Scholvin & Wigell, 2018). However, we seek to extend this essentially state-centred notion of geoeconomics, that is prevalent in the discipline of IR, and add an explicitly spatial and firm-centred notion inspired by disciplinary thinking in economic and political geography. Dicken (2015), for example, understands geoeconomics as an outcome of strategic—global—economic activity and thus a driver of (global) economic inequality, while Dörry and Dymski (2018) consider the uneven distribution of global capital gains a stand-alone ‘geo-economic’ issue.

Several other factors determine our approach to the concept of geoeconomics. First, the tension between the private and the public sector is an important notion with which this chapter is concerned. During the co-constituting eras of neoliberalization and (financial) globalization, large corporations, including globally operating financial firms, have become part of a powerful global elite able to dominate and instrumentalize the state for their own purpose (Crouch, 2020; Merkel, 2019). Second, the global dynamics of the economy have further influenced the conceptualization of geoeconomics, and recent changes in the global realms of both politics and economics force us to rethink and reposition the relationship between economy and politics. Søilen (2012) stresses this point when defining geoeconomics as the ‘continuation of the logic of geopolitics, applied to the era of globalization’ (p. 8). Third, however, we show that geoeconomics is not a one-way approach in which one state wields power and influence over others, as is often implied in the concept of geoeconomics (Vihma, 2018a), exemplified by Russia’s strategy of using its energy resources to leverage its political interest over other states (Wigell & Vihma, 2016), or accounts of the export-oriented geoeconomic power of China and Germany to influence exchange-rate policies in Europe and the Far East, respectively (Baru, 2012). Rather, we suggest that regions/states themselves reach out actively and strategically to specific (economic) actor groups. IFCs embedded in states like Luxembourg are a specific case in point. They do so to benefit from the economic power of these global actors (Coe & Yeung, 2015) in order to enhance their own economic power that would implicitly enable them to exert their (growing) economic means for future political advantage. Aptly put, geoeconomics includes strong elements of a “revival of economic statecraft” (Wigell et al., 2019).

The chapter develops its arguments across five sections. Section ‘The Internationalization Strategy of China: A Geoeconomic Project?’ sets the Chinese state-owned banks committed to geoeconomic agency, as well as the Chinese state and the Luxembourg IFC, in context and situates it among the broader strands of literature. Section ‘Banks: Agents of Change’ reviews the different internationalization strategies of banks in order to understand their organizational patterns, their derived functions and structural positions of power. Section ‘Anchoring Geoeconomics—Strategic Interests of Luxembourg’ links Chinese bank networks in the EU and their headquarters in Luxembourg with Luxembourg’s own expansion strategies in its capacities as an IFC. The final section offers a critical reflection on geoeconomics as an analytical concept and, in this context, reflects on the Chinese banks in Europe as agents of change. In light of its empirical findings and conceptually embedded in the framework of geoeconomics, the final section also suggests avenues for further research on Chinese banks and their financial activity in Europe, and beyond.

The Internationalization Strategy of China: A Geoeconomic Project?

Over the past decades, the extensive network of Chinese state-owned commercial banks (‘Chinese banks’ in the following) has successfully internationalized to Europe and beyond, in order to support the expansion of Chinese (state) corporations. In doing so, Chinese banks respond to two different yet inseparable logics; the global capitalist market and the Chinese state, the latter in the sense that Chinese banks follow relatively strict state guidelines on strategic investments. In their expansion, Chinese banks’ operations materialize in regions which they consequently influence in their economic development. Yet, China’s economic internationalization is also an inevitable consequence of its remarkable economic growth during the past decade. This was enabled and accompanied by the internationalization of Chinese banks since 2010, especially after 2013, and coincided with the launch of the One Belt One Road development project, later dubbed Belt and Road Initiative (BRI).

As state-owned entities, the mission of Chinese banks is primarily defined in accordance with state guidelines (Dikau & Volz, 2021) that strikingly resemble the ‘window guidance’ strategies applied by East Asian developmental states. Window guidance, in a nutshell, refers to a policy instrument to effectively direct and control the growth of lending by commercial banks (for the example of China, see, e.g. Beggs & Deer, 2019; Bell & Feng, 2013; He, 2014). Window guidance is prevalent in Asian bank-centred financial systems (Sasada, 2013), in which commercial banks are often owned by the state (So, 2016). State governments identify socio-economic priorities to ensure that financial investments are channelled to targeted sectors and firms in order to boost industrial expansion and exports (Woo-Cumings, 1999). The Chinese government, for example, defines strategic targets in various documents and programmes, including its (14th) Five-Year Plan, the BRI and the Made in China 2025 strategy. However, despite the differences with South Korea, Japan and Taiwan, China displays similar conditions and characteristics to other so-called East Asian developmental states (Helleiner, 2021; Knight, 2014; Yeung, 2017; Zhang, 2018): (1) China’s largest commercial banks are state-owned. (2) The state controls the banking systemFootnote 1 in order to ensure that commercial banks direct sufficient credit to strategic sectors and firms (and withdraw capital from industries the state considers to have failed to comply with state guidelines, see, for example, the latest excesses of China’s real estate industry). (3) The People’s Bank of China (central bank, PBC) supports the banking system through a respectively defined monetary policy. Overall, window guidance therefore has resulted in an informal process (Dikau & Volz, 2021; Woo-Cumings, 1999) that commercial banks follow through their credit decisions. This is important because the discourse on economic internationalization and foreign investment is firm-centred (e.g. Xie et al., 2021) and implies that firms allocate financial resources towards politically privileged sectors, supported by industrial and monetary policy.

In this chapter, however, window guidance implies, in short, that Chinese banks act in a more development-driven than purely profit-oriented manner, a point we will detail below. Banks seem to invest in strategic assets in the real economy to the benefit of the many rather than in purely financial assets (Stent, 2017) that may further inflate asset prices and serve speculative investments for a select few only. Chinese banks are thus—although being the largest banks in the world—not (yet) part of financialized market-based banking (Hardie & Howarth, 2013). This is echoed in their internationalization strategies, which we discuss across three dimensions in this chapter: cross-border lending, mergers and acquisitions (M&A), and the increasing physical presence of Chinese corporations and banks abroad, including foreign direct investments (FDI). This suggests that, for the moment, the political trumps the economic. The apparent contradiction between a capitalist banking system and the embeddedness in the state logic and dynamics defines the puzzle of the internationalization of Chinese bank networks in the EU—and the notion of geoeconomics with which we engage.

Since a strict dichotomy between the state and the market as both an analytical and policy approach may encounter partiality or cultural bias, identifying some key pillars of Chinese philosophy will help understand economic development from a Chinese perspective. The concept of the state builds on Taoist and Confucian thinking (Weber, 1951) and aims at a Confucian-inspired formation of societal hierarchies: The state sits at the top and holds responsibility for social-cum-economic harmony, as recently reflected in Xi Jinping’s project of ‘common prosperity’Footnote 2 (The Economist, 2021). It is complemented by the tradition of Chinese Legalism,Footnote 3 which conceptualizes a strong, centralized and pragmatic state administration, and ensures the efficiency of the government (Hahm & Paik, 2003). Today, in China, the pragmatic state and the efficacy of the government are visible in two main features. The first is the dichotomy of political concentration—the apex of the Communist Party of China as the key place for decision-making—and economic decentralization, that is, the localized and diversified implementation of macroeconomic policies (Zhang, 2018). The second is the pervasive presence of the state in the banking system, not only in the shareholder structure of major banks, but also in the credit and monetary policies that direct investment (Sun, 2020). The entwinement of these two points, in turn, exemplifies how China is different from an advanced democracy with a broad-based welfare system and industrial policy. In China, credit policy becomes an inherent constituent of bank governance and the actual instrument of economic development, which complements the socio-political relationships (guanxi) between the state and the firm.

Chinese economic pragmatism during the 1980s/1990s has spread across the banking system. It established hundreds of small, private and locally bound banks to serve small and medium sized enterprises (SMEs) across China, which is one important foundation for the model of ‘capitalism with Chinese characteristics’ (Huang, 2008) that follows the historically and culturally deeply rooted primacy of the state over the market. The introduction of capitalist institutions in China is progressively changing its socio-economic landscape and, to a certain extent, the conceptualization of China’s traditional state-market nexus. The pervasive presence of the state in the economy inspired Western scholars to interpret the Chinese state as entrepreneurial. For example, Gonzalez-Vicente (2011, p. 404) assumes that, in the early stages of China’s economic internationalization, the increasing autonomy of Chinese state-owned enterprises (SOEs) was to be understood as ‘an effect of the entrepreneurial statehood rationale’ and not as the state retreating from the direct management of the economy. Today, this thinking has accumulated in the further engagement of market-oriented reforms promoted by Chinese pro-reform policymakers and scholars,Footnote 4 which do not question the primacy of the state.

Another recent strand of literature that focuses on the geoeconomics of the BRI includes currency internationalization and state capital-driven asset management (Baracuhy, 2018). Most importantly, it equates the geoeconomics of China with its expansionist strategy realized through the BRI and attributes multiple geoeconomic and geopolitical meanings to it. For example, for Narins and Agnew (2020), the BRI project provides an important answer to China’s geopolitical dilemma of expanding its role in the world while keeping the defence of its national borders at the core of its strategy. Summers (2016), on the contrary, sees the BRI as a state-led spatial fix to facilitate the creation of networks of capital across the Eurasian continent. In a different vein, Winter (2021) argues for the geocultural power of the BRI as a means to build regional alliances. Ly (2020) considers the BRI as an opportunity to internationalize China’s currency, the renminbi (RMB), which in turn will help China to develop and strengthen its domestic financial system. The internationalization of the RMB is interchangeably understood and defined as either a geoeconomic (Huotari, 2018) or a geopolitical (Hasegawa, 2018) phenomenon, through which China will increase its regional power in Asia. While these contributions are far from agreeing on a common understanding of the essences of geopolitics or geoeconomics, each contribution stresses the importance of the conceptual prefix ‘geo’.

To enhance its analytical subscription, we propose to complement this mainly structural definition of geoeconomics with a relational, agency-centred concept. We do this by following up on the afore-mentioned important role of Chinese state-owned banks and their agency abroad. However, given the significant differences between Chinese actors, especially between SOEs, and their different strategies in their host countries, an analytical geoeconomic approach from this perspective may be too general and oversimplified (Yeh, 2016). Contributions assembled in a special issue in Political Geography (Oliveira et al., 2020), for example, address this risk of oversimplification and show how the BRI is not a monolithic programme imposed by China but co-constructed by Chinese and non-Chinese agents, sometimes embedded in contradictory discourses (Liu et al., 2021). This complexity echoes in the multifaceted formation of bilateral cooperation agreements and deals that China underwrote together with European countries (cf. Sielker & Kaufmann, 2020). Another recent special issue in Eurasian Geography and Economics (Lai et al., 2020) focused on the topic of financing the BRI. This research agenda seeks to understand foreign economic development through Chinese aid and FDI (Dunford, 2020; Liu et al., 2020), and the effects of huge infrastructural projects and potential domestic costs for BRI countries (Rowedder, 2020). Interestingly, Summers (2020) suggests that China’s ability to challenge the structural power of the existing Western institutions through the BRI is rather limited. Echoing Oliveira et al. (2020), Liu et al. (2020) find that BRI projects are particularly defined by inter-governmental cooperation, which suggests the existence of a shared space of co-production between Chinese and non-Chinese state institutions. Importantly, they add that BRI projects ‘involve more complicated and innovative financing structures than do traditional FDI projects’ (p. 139).

Although we develop our argument drawing on the example of Chinese banks, Chinese financial activity in Europe is still limited when compared to the investment potentials of Chinese corporations and banks. Research directed towards understanding modalities and agency involved in internationalization strategies remains to be better identified and analyzed in the future. Chinese banks building extensive networks into Europe (Balmas & Dörry, 2021) are an important example and provide corporate financing services (e.g. Mergers and Acquisitions, M&A) to their Chinese corporate clients and engage directly in investing/financing infrastructure projects, private equity acquisitions and currency services such as lending and clearing. At the same time, however, banks adhere to the logics of the Chinese state. In these processes, Luxembourg plays a pivotal role in “transiting” Chinese FDI to the EU.

Luxembourg hosts the largest headquarters of Chinese banks that design the fund structures to invest in private equity and infrastructures along BRI countries, and it is a key centre for RMB investments and RMB-denominated bond listing. Yet despite this seeming importance as a strategic node in Chinese foreign bank networks, and despite the fact that Luxembourg has enthusiastically embraced and politically supported the creation of Chinese banks, financial activity remains limited so far. This concerns, for example, the difficulties of integrating business from Chinese banks—or the lack thereof—into the national economies, which has caused disappointment in the recipient countries, e.g. in Luxembourg (Schmit, 2021). Such difficulties seem to have two root causes. First, local practitioners’ lack of knowledge and trust towards Chinese financial institutions derives in part from the absence of marketing and distribution activity of Chinese banks’ services and products throughout the EU. Their slow and seemingly somewhat cautious integration process, which is still in an early stage, does not align with business expectations from EU host states. European policymakers asking Chinese banks to engage more into EU economies resonates in the broader political changes at EU level. China’s growing economic activity in the EU, e.g. M&A activities with/of European companies, has set the stage for the EU Commission to adopt a tougher stance towards China in the EU Strategic Outlook (European Commission, 2019) and to revise the EU Merger Regulation (European Commission, 2021; cf. Svetlicinii, 2020). At the same time, the European Central Bank has started to discuss and negotiate the intermediate parent undertaking (IPU) regulation that will strongly affect the future governance of EU-based Chinese banks (Global Times, 2018, January 31). This stiffening does not only affect negotiations between the EU and China for the currently pending Comprehensive Agreement on Investment; it also triggers political reactions that could lead to changes with regard to the originally hoped-for economic integration between the EU and China. All considerations on the actual cooperation and co-production that define the BRI, as well as the integration of Chinese banks into the European financial landscape, seem to be at odds with the tougher stance of EU political institutions towards China. Many geopolitical fears of EU countries linked with the rise of China refer to sensitive economic activity such as strategic infrastructure investment and company acquisitions.

Banks: Agents of Change

Commercial banks are economic entities that create credit. In doing so, they decide where, what and who to finance according to their financing strategies and risk management, which in turn ‘reshapes the economic landscape, across a variety of spaces’ (Werner, 2013, p. 2792). Alluding to this understanding, we suggest that analyzing Chinese bank expansion into the EU reveals the functions they perform outside their home country and helps to better understand China’s geoeconomic projection.

Christophers (2013) identifies three internationalization strategies of banks. First, banks can export their services without establishing a permanent presence in a foreign jurisdiction. Second, they can enter foreign markets by establishing a presence through branches and/or subsidiaries, or they can acquire and control foreign banks through FDI. A third option is portfolio investment. Chinese banks are expanding their business in Europe through the establishment of branches and subsidiaries. However, Cerutti et al. (2020) find that they are also exporting their services to emerging markets, often without establishing a permanent entity there, while preferring being present in advanced economies. This suggests that Chinese banks organize their business strategies according to political and regulatory differences in target markets. In stable economies where their business is more concentrated, such as in Europe, Chinese banks opt for establishing permanent offices. Interestingly, not Chinese banks but corporations have acquired local banks in Europe, as we will briefly discuss below.

Bearing in mind that branches and subsidiaries theoretically operate in different arenas of competition (Heinkel & Levi, 1992), several reasons influence strategic decisions to set up one rather than the other model. For example, the parent bank may prefer to establish a branch when a foreign jurisdiction offers the right conditions to raise funds at a lower cost, which a branch easily reallocates to where it earns higher returns (Fiechter et al., 2011). Other motivations may take into account that the setup of branches is less costly, as compliance needs with the host country’s company law are low (Schön, 2001), but subsidiaries are less costly to dissolve in case of failure (Fiechter et al., 2011). These theoretical distinctions can vary in practice, but as a rule of thumb, branches are primarily oriented towards wholesale and corporate activities, subsidiaries more towards retail services. However, Chinese banks in the EU do not engage in local retail markets.

Although implying different ways to raise capital, the decision to establish either a branch or a subsidiary depends not only on the parent bank’s strategy. Rather, regulations in both the host and the home country tip the scales, specifically with regard to a bank’s business objectives and the associated risk exposure that varies between both organizational models. The aim of such strategic decisions is to manage liquidity most effectively by transferring assets routinely among branches and subsidiaries (State Street, 2019). A foreign branch can take advantage of its parent’s balance sheet (Abrahamson, 2020), while the subsidiary is incorporated in the host country and therefore partly independent from its parent bank. Branch networks are centralized, which helps capital move easily within the network of branches, that is, from jurisdictions where raised capital is cheaper to jurisdictions where returns are higher (Fiechter et al., 2011), reflected by the logic of transfer pricing in globally operating firms.

Chinese banks’ territorial organization in Europe is not new to the markets. In the 1970s and 80s, Japanese banks adopted a similar strategy to internationalize their businesses in Europe (Düser, 1990). While in Luxembourg they established subsidiaries only, they established branches and subsidiaries in Switzerland, Germany and in their main headquarters in London. Curiously, Hall (2021) notes that, before 2014, London’s regulator allowed Chinese banks to establish subsidiaries only. In contrast, in Switzerland and Germany, Chinese banks have established branches only. As a type of state-owned banks, German Landesbanken offers another interesting example as compared to the Chinese strategy. Landesbanken expanded throughout Europe through the setup of branches and/or subsidiaries but followed their corporate customers to the United States in the 1970s to internationalize their operations and operating branches in New York, where they also enjoyed access to the local financial markets (Pohl, 1994). Thus, Chinese banks’ networks in the EU, through their territorial organization and legal structures, reveal in part their strategies and their future potential.

The branch-subsidiary structure in Luxembourg enables Chinese banks to perform corporate financial services for their corporate clients across the EU. Luxembourg is a leading hub for bond listing services to both Chinese banks and their clients, not only for the fledgling green bond market. More relevant to our argument is that because Chinese bank subsidiaries in Luxembourg govern a wide network of their own branches across the EU (Balmas & Dörry, 2021), they have direct contact with the localized markets of financing SMEs in the EU, a business that is still recovering from the credit crunch of 2008/09. China’s participation in the EU’s economic development through its large banks would increase both its geoeconomic advantage in the EU and its economic power over the EU.

However, banks do not only affect host countries economically, but also politically. Spendzharova (2014) explains how foreign ownership of domestic banks in Central and Eastern European Countries (CEEC) has affected both the integration process of those countries into the EU and the making of the European Banking Union. In the same vein, Epstein (2017) has analyzed the implications of Western banks’ systematic acquisitions of CEECs’ banks with cases reaching up to 100% of foreign ownership. She found that banks’ foreign ownership correlates with the weakening relationship between the host state and its banking sector. Studies of banks’ foreign acquisitions suggest that foreign banks affect the socio-economic organization of the host country by reshaping the landscape of resource allocation and have a major impact on domestic politics. Acquisitions of local (retail) banks imply a high degree of penetration into and control over the local economy (Epstein, 2017), e.g. by allocating capital resources where and to whom it is economically and politically most opportune. However, as mentioned before, not banks but Chinese corporations acquired local banks across Europe, with three acquisitions exemplifying this: Banque Internationale à Luxembourg by Legend Holdings in 2017; the German bank Hauck & Aufhäuser by Fosun Group in 2015; and the Danish Saxo Bank by Geely in 2017. The political implications of a wider presence of Chinese corporations into the EU banking sector could, for instance, strengthen lobbying power over the EU Commission and the European Bank Authority. This might be another way for the Chinese state to exert economic and political influence within the EU in the years to come, not least by providing RMB services through non-Chinese banks.

Anchoring Geoeconomics—Strategic Interests of Luxembourg

For China, Luxembourg is a transit country for FDI operations and the most important one in Europe. More than 40 percent of Chinese investments into Europe passes through Luxembourg (Arendt, n.d.). Marketing and distribution of investment and RMB services are, however, still limited, although Chinese banks have built an extensive network of affiliates throughout the EU. They are headquartered in Luxembourg, where six of the seven largest Chinese banks are organized in a dual branch-cum-subsidiary structure, and from where subsidiaries govern networks of branches across the EU. This allows Chinese banks to take advantage of the balance sheets of their large parent banks in China, while concomitantly accessing other EU member states through their subsidiaries, which are locally incorporated banks allowed to open up their own branches across the EU. Building on this argument, the widespread presence of branches and subsidiaries of state-owned commercial banks in the EU gives China the opportunity to influence parts of the EU economy. However, as central banks can influence the credit supply by commercial banks through a regime of credit control (Ryan-Collins et al., 2014), Chinese banks in the EU are also geoeconomic actors, which in turn may determine parts of China’s own economic development.

Chinese banks are active in the RMB-denominated (green) bond listing, with the Luxembourg Stock Exchange currently taking the lead with more than 250 RMB-denominated bonds (LuxSE, 2020). Issuers of Luxembourg-based RMB bonds include the Chinese national development banks, even though they do not have representative offices there. Interestingly, Chinese development banks, along with Luxembourg-based Chinese banks, are investing through alternative investment funds that target private equity and infrastructure projects in Europe, with a particular focus on CEE countries. Chinese banks in Luxembourg, however, use different vehicles to allocate their resources, and the governments of China and the EU countries have co-constituted the conditions under which Chinese banks operate within the EU. These and similar conditions enable Chinese and EU banks and corporations to perform capital market services in both the EU and China. One enabling instrument of such operations is MOUs, which also define an important geoeconomic dimension.

A Memorandum of Understanding (MOU) is a bilateral decision to complement international agreements. MOUs are directed to effectively implement actual practices not explained in detail in international agreements. Often, international agreements do not detail what and how each actor involved in an international agreement can do. For example, a double tax treaty (DTT) is an international agreement between two parties to avoid double taxation from both imports and exports of goods and services. The treaty, however, does not enter into the specifics of relevant factors affecting the business of key players in the economy, e.g. stock exchanges. Stock exchanges based in two different countries may sign an MOU to complement an international treaty such as a DTT. In the same fashion, agencies representing specific sectors like banking or asset management, may sign an MOU in order to define practices to follow when banks or investment funds enter the other jurisdiction. Thus, while international agreements define the operational framework for actors, an MOU outlines the guidelines for obligatory practices actors will obey. This makes MOU atypical soft law tools (Adamski, 2020), with their legal status and binding effects not always being clearly defined (Masilo, 2020). Table 7.1 depicts signed agreements between Chinese and Luxembourg agents that help to organize the business environment for banks and investors, including Luxembourg’s fund industry and bond market, the BRI and China’s securities markets.

Table 7.1 Most relevant MOUs between financial entities from China and Luxembourg
Full size table

Four important features shape China’s bank presence in Europe, especially in the EU and Luxembourg. First, (most of) Chinese banks have adopted a specific, if not unique, branch-cum-subsidiary structure, which enables them to perform their core business—providing corporate financing services to Chinese corporations—in the most efficient way. Second, Chinese banks have a wide network of branches, subsidiaries and sub-branches within the EU but do not (yet) use them to their full potential, e.g. they do not expand RMB services, and limit marketing services and distribution of their knowledge and financial products. Third, the environment in which Chinese banks operate is the result of a complicated design of local, international and Chinese regulations, co-constituted by Chinese and European governments and financial institutions. Fourth, while subsidiaries of Chinese banks maintain their presence in Luxembourg and the EU, some have recently reported losses. The continued maintenance of financially non-viable banks, however, profoundly contradicts the capital(ist) market logic. Rather, it suggests that some Chinese banks may be constrained in operating freely in the EU, underscoring the need for furthering detailed analysis as proposed in this chapter. Given both their success in China and their financial potential, banks would generally be expected to perform economically in the EU and suggests that political motivations may take precedence over economic ones. Given the banks’ inherent geoeconomic power, we assume that these four characteristics are important, if not the only, preconditions for the geoeconomic power of Chinese banks in the EU.

Critical Reflections and Conclusion

In this chapter, we sought to contribute to further understanding the concept of geoeconomics drawing on the example of the (economic) expansion of Chinese state-owned banks’ to Europe and their networks within the EU. Chinese banks embody the specific characteristics of state capitalism in China, including its goals for economic development and social equality within China and its external projections. The state logic of Chinese banks is reflected in their mission to follow rigid state guidelines and serve the real economy both inside and outside its territory. It is important to acknowledge that Chinese banks are state-owned and respond to two different yet closely intertwined logics: the Chinese state and the global market. This makes Chinese banks both political and economic agents of China’s economic expansion strategies across the globe, and particularly in Europe. We identified that Chinese bank networks primarily provide a platform to perform Chinese corporations’ direct investments but also that Chinese banks perform a set of other functions, including the provision of RMB services and therefore promoting the international expansion and use of the RMB. Further, we identified important mechanisms and practices, e.g. the international organization of bank networks, their anchoring in certain places like Luxembourg, and the limited meeting of expectations by Western policymakers, as well as instruments (e.g. MOUs) and strategies (e.g. window guidance) that define important aspects and dimensions of the concept of geoeconomics and complement the ascribed agency of Chinese banks.

As shown throughout this chapter, an interesting paradox arises. As the banks’ expansion into the EU is a factor of a broader geoeconomics of the Chinese state and given that the EU is a large recipient of Chinese FDI as well as an important destination of the BRI, future research into this paradox is of particular importance. As agents of the state, the banks’ inherent expansion in Europe implies that they are geoeconomically motivated. Ironically, however, the fact that Chinese banks are limited in their activity and strictly adhere to the Chinese state developmental guidelines at the same time constrains their geoeconomic power. This suggests that they are constrained geoeconomically by the geoeconomic calculus of state developmentalism. Put differently, and somewhat ironically, the banks’ constrained expansion in Europe may be a factor of a broader geoeconomics of China’s state development in which Europe figures. That the banks are not operating with their full potential is due to various reasons: First, their business strategies and operations do not seem to be entirely profit-oriented, at least for the time being. Second, banks are not providing as many services as they could, e.g. large RMB investment service providers in Europe are Western and not Chinese banks. Third, all Chinese banks seem to be engaging in a cautious step-by-step expansion and most of them (5 out of 7) started to operate in Europe only recently. In a nutshell, while the banks’ business activity is still limited their networks are extensive and growing, as are the geopolitical concerns of EU state officials.

Nevertheless, Chinese banks have the potential power to reshape parts of the socio-economic and political landscape of the countries where they expand their networks. To date, they have not (yet) fully utilized/exerted that power, as their presence and continued territorial expansion across the EU over the last decade has not coincided with an expansion of their services, at least for the time being. This does not mean that they are not framed within the geoeconomic logics of the Chinese state. A closer look at Chinese state investments in Europe by sector (cf. Babić, 2021) reveals their strong orientation towards technology and knowledge acquisition for domestic economic-developmental purposes, which is not always purely profit-driven. However, Chinese banks may exert their geoeconomic power in the future, with relevant implications for local economies and economic development in Europe.

Our summary of the analysis provided in this chapter allows us to further critically engage with the concept of geoeconomics, including a brief elaboration of its strengths and limitations by way of the example of our case study, and a more general conclusion regarding the concept’s application. We started with and incorporated an understanding of geoeconomics as a state’s more subtle means than military power to secure relative gains (e.g. Scholvin & Wigell, 2018); yet, we departed from this overall structural literature by adding concrete agency to identified key players. While we consider the focus on concrete agency important, the concept of geoeconomics is rather limited in providing concrete analytical guidance. Here, we borrowed from the literature concerned with tracing (economic and political) agents and product(ion) networks as, for example, performed in economic and political geography. The apparent contradiction between a capitalist banking system and the embeddedness in the state logic and dynamics remains a theoretical wellspring for future research, which would explain better the internationalization of Chinese banks. This chapter sought to address this by identifying and highlighting the particular role of specific agents (banks, regions, states) and their relational agency. The expansion of Chinese banks in the EU provides an illustrative example of geoeconomics by unpacking the relationship between the state, the firm and place(s). Following these actors through their permeation into foreign jurisdictions requires a more micro- and meso-level oriented analysis, which we suggest would complement the understanding of the state as a monolith operating in the international arena. Geoeconomics provides a perspective for analyzing the emerging complexities of the global economy where particular state agency, not states, alongside other agency performed by firms and banks (co-)create the political and economic conditions for expansion and development. Thus far, scholars have paid little attention to the (economic) expansion of Chinese banks into Europe and their potential political motives and constraints. The relevance of the banks’ presence and the power they could exert in the future deserve further research.

Beyond understanding the role of Chinese banks in the performance of China’s FDI to Europe and the consequences of increased RMB activities, we suggest two important avenues for further (empirically driven) research, not least in order to assign more analytical power to the concept of geoeconomics. First, and as a consequence from a series of Chinese acquisitions in Europe, a better appreciation of the implications of Chinese corporate heavyweights in the European banking system would help strengthen a key dimension of the geoeconomics concept. This key dimension comprises China’s potentially rising economic statecraft abroad, informed by the contradictory notion of ‘constrained geoeconomics’ of Chinese banks in Europe outlined above. Second, our analysis suggests that in-depth insights into the role and relevance of the political dimension of Chinese banks would contribute to recognizing more clearly their strategies and practices as materializations of this perceived statecraft. More generally, we believe that research on these two topics would enhance our understanding of China’s progressive and challenged integration into the global system. And last, but by no means least, it would also help to further and better comprehend the nexus between China’s growing banking system and its geoeconomic power in the world.