International RMB: Luxembourg 1 Rest of Europe 0

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London should be wary of the Duchy’s ambitions to become Europe’s RMB hub.

For a tiny, landlocked country with a population roughly the size of a London borough, Luxembourg sure does punch above its weight in the world of finance and investment.

In attracting Chinese investment and capturing a healthy and growing share of the offshore renminbi market, this is especially true. The Duchy, the Luxembourg government, ministry of finance, central bank and financial regulator have all been working hard together to make Luxembourg China’s preferred European outpost.

It is teamwork that is paying off. The country is a favourite destination of Chinese investors in the European Union, is home to the European headquarters of China’s three largest banks – more are expected to come – and on many levels can claim to be Europe’s leading hub for renminbi. But this shouldn’t come as a surprise to anyone.

An advantageous taxation and legal system combined with bureaucratic expediency and flexibility is a potent combination few other jurisdictions have. That it is second only to the US as an international investment fund centre certainly helps too.

But does this mean Luxembourg is stealing a march on the likes of London, Paris, Frankfurt and even Zurich and New York in the race to be the leading western hub for renminbi? It’s got its nose out front so far. The race however, is long.

The renminbi has only just graduated to a top 10 world currency for the first time, according to the BIS. And while China accounted for more than 10% of the world’s total trade in 2012, the renminbi accounted for only 0.25% of all trade settled. "The RMB is a 10-year game," says one senior banker.

Yet other potential centres cannot afford to sit back. The rise of the renminbi as a global currency promises to be one of the most profound developments in global finance, and it is important to position accordingly for that.

The Bank of England’s agreement with the People’s Bank of China over a Rmb200 billion swap line shows the UK’s continued commitment to supporting something that bankers argue London needs most – liquidity in the currency.

But most bankers say an officially mandated RMB clearing bank in London must happen sooner rather than later.

Must it? With the Chinese government and PBoC preparing to launch the China International Payments System (CIPS) – new unified global renminbi clearing system – as early as later this year, it might not. For the first time, international banks will have a direct route via CIPS to a renminbi clearing system operated by the PBoC and supported by its sovereign credit.

One thing is for sure: the race is far from over.