SHANGHAI, July 4 -- China's leading online payment firm Alipay and Agricultural Bank of China (ABC), the country's third-largest lender by assets, will set up branches in Luxembourg, announced Luxembourg's finance minister at a forum in Shanghai.

"We are delighted to welcome Alipay to Luxembourg where it will join other leading innovative e-payment companies such as Paypal and Amazon Payments. This is a strong reflection of Luxembourg's position as a modern, dynamic banking hub which provides an environment for e-commerce companies to thrive," said Pierre Gramegna on Thursday.

Alipay's move came after a visit by the Crown Prince of Luxembourg and the country's deputy prime minister and minister of economy to Alipay's Hangzhou headquarters in east China's Zhejiang Province in December. There they were told of the growing interest among Chinese companies to use Luxembourg as a gateway to the European market.

Gramegna also said ABC is preparing to set up its EU headquarters in Luxembourg.

Five major Chinese banks have chosen Luxembourg as their hub in Europe confirming its attractiveness as an entry gate to the EU single market, he said. "With these new financial players from China, Luxembourg will also further increase its leadership as a European renminbi hub."

Luxembourg has reached a deal with China's central bank to appoint a bank to clear transactions in the Chinese yuan, also known as renminbi.

It will be the third of its kind in Europe, after China Construction Bank and Bank of China were recently designated as clearing banks for London and Frankfurt respectively.

Luxembourg boasts Europe's largest renminbi deposit with 79.4 billion yuan by the end of the first quarter of 2014 and maintains the lead in yuan-denominated loans, fund and bonds.

With a string of deals clinched with China's central bank, Europe is rising as an offshore yuan center other than Hong Kong.

Europe is likely to become the second-largest offshore market for the renminbi, with a deposit base expected to reach 2.5 trillion yuan by the end of this year, Deutsche Bank strategist Liu Linan said in a research report published on Tuesday.

According to Deutsche Bank, London will focus on institutional investment demand and has great potential to develop offshore renminbi products, while Frankfurt will tend to corporate demand for renminbi services and financing solutions.

The bank also predicted that with clearing facilities now available in the European time-zone, more trade between China and the EU will be settled in renminbi and account for roughly 6 percent of China's total trade with the rest of the world in the next three years, compared with less than 1.7 percent in 2013.

While Europe has been eager to facilitate the yuan's use in the region, it is also seeking channels to invest its yuan holdings. One option is to channel the offshore yuan back to China and invest in the country's capital market.

However, with China's control over its capital account, foreigners can only invest through a scheme Chinese authorities created in 2011 to allow foreign investors limited exposure to the country's stock market, called Renminbi Qualified Institutional Investors (RQFII).

Mark Boleat, Chairman of the Policy and Resources Committee at the City of London Corporation, said during his visit to Shanghai last week that UK investors want deeper involvement in China's capital market through increased RQFII quota.

"As the Chinese economy becomes even more integrated with the world, institutional investors would want to hold investment in renminbi," Boleat said.

So far the United Kingdom has been allowed to invest up to 80 billion yuan in China's capital market. The quota was granted in October and the first to have been obtained by overseas institutional investors other than those in Hong Kong.

In addition to the United Kingdom, China also granted another 50 billion yuan quota to Singapore in October, followed by 80 billion to France in March.