Chinese bank networks in Europe: FDI-oriented by legal and strategic design

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ABSTRACT Chinese banks have been building an extensive network of branches and subsidiaries across the European Union, which they govern from their European headquarters in Luxembourg. This striking observation guides this paper’s research questions: Why do Chinese banks create such branch-cum-subsidiary structures across the EU, and why do they do it in Luxembourg? The paper dissects forensically these financial structures and mechanisms forged through the co-design of Luxembourg’s legal-business environment and Chinese banks’ internationalization strategies. We argue that Chinese banks facilitate Chinese FDI, and that this function determines the particular branch-cum-subsidiary structure of Chinese banks in the EU. It is a unique feature impossible to establish outside the EU. Chinese state-owned banks in Luxembourg are thus important, yet analytically widely neglected actors in the formation of global financial networks (GFNs). This research is particularly significant when considering the intensifying integration of the emerging Chinese market into global finance and, in particular, into the EU banking union. Empirical findings suggest that Chinese banks in Luxembourg use the specific branch-cum-subsidiary structures to (i) finance both their large Chinese and European corporate clients, which (ii) allows Chinese banks to circumvent specific regulatory and operational constraints in other EU member states, especially when (iii) serving Chinese corporations in their FDI to the EU. The internationalizing Chinese bank networks in the EU can thus be defined as FDI-oriented by legal and strategic design. This research highlights their constituent features and the resulting capabilities of GFNs that affect regional investment activities.