The One Belt, One Road initiative has become central to China’s evolving role in the global economy. This initiative is part of China’s ambitious strategy to target the economies along the “one belt, one road”, which account for approximately 63% of the world’s population and 29% of global GDP. As China is rebuilding its Silk Road trade links with Asia and Europe, strong ties are expected to cover the world’s main centres of Islamic finance – the Middle East and Southeast Asia, where Shari’a-compliant assets account for as much as a quarter of total banking assets. The growth potential of Islamic finance in China is huge given the country’s 1.3 billion population. Even if we take a more cautious and pessimistic view of the demand for Islamic financial services; 2% Chinese Muslim population makes a 26 million untapped market.
ONE BELT, ONE ROAD
The One Belt, One Road (OBOR) refers to twin initiatives covered by the Silk Road Economic Belt and 21st Century Maritime Silk Road, a development strategy of the Chinese government aimed at promoting economic co-operation among countries along the proposed five routes, connecting Asia, Europe and Africa. The Silk Road Economic Belt focusses on: (1) linking China to Europe through Central Asia and Russia; (2) connecting China with the Middle East through Central Asia; and (3) bringing together China and Southeast Asia, South Asia and the Indian Ocean. Meanwhile, the 21st Century Maritime Silk Road, focusses on using Chinese coastal ports to link China with Europe through the South China Sea and Indian Ocean; and connect China with the South Pacific Ocean through the South China Sea.
The OBOR’s initiatives extend beyond physical connections as it aims to create the world’s largest platform for economic cooperation, including policy coordination, trade and financing collaboration, and social and cultural cooperation. It also offers China a gateway to use Islamic finance to build business relationships and foster increased cooperation on infrastructure projects with the Middle East and the Muslim-majority Southeast Asian and African countries. Once completed, OBOR is said to impact some 4.4 billion people and generate trade beyond US$2.5 trillion.
UAE AND CHINA’S THRIVING PARTNERSHIP
During the past decade, trading between China and Middle East has increased considerably. China is the largest importer of oil from the Gulf region and OPEC’s share of China’s oil imports is increasing. Trade between the UAE and China increased fivefold to register a growth rate of 395% over the past 10 years. The GCC governments see the more influential China as a source of growth vis-à-vis the United States and Europe. As China expands its economic influence in the Middle East, Islamic finance will gain more prominence in China and open doors for Chinese companies to tap on Islamic finance capital markets. This will only have a positive influence in developing Islamic finance in China.
Both the “One Belt, One Road” initiative and the recent initiative by H.H Sheikh Mohammed bin Rashid (Vice President of the UAE and Ruler of Dubai) of making Dubai a “global capital” of Islamic economy; are together paving way for Islamic finance to contribute to China’s ambitious economic plans. The essential logic of Islamic funding is compelling for China as the country’s capital needs are growing exponentially.
Dubai with its excellent Islamic finance infrastructure provides China a gateway to access liquidity from the Middle East, North Africa and sub-Saharan Africa. Dubai is now the world’s largest center for sukuk with listings of US$36.71 billion taking over Malaysia as the world’s leading center for international sukuk listings. Nasdaq Dubai currently lists about US$55 billion in bonds and sukuk.
“As China turns to Islamic finance to expand its economic clout, the “One Belt, One Road” could be the much-needed boost for Islamic finance.“
In 2016, the China Construction Bank (CCB), one of the largest listed banks in the world, listed a US$600 million bond on Nasdaq Dubai. The listing supported the expansion of CCB’s commercial and financing activities across the Middle East. With this recent listing, CCB became the fourth Chinese bank to list a bond on Nasdaq Dubai. This is an indicative of the expanding economic ties between Middle East and China.
Various events and transactions have formed strong foundations for Islamic finance to contribute to China’s economic plans. The events are depicted in the infographic that looks at the development and status quo of Islamic finance in Greater China Region including Hong Kong SAR, Mainland China and Taiwan.
The opening of the Chinese banking sector to foreign banks in 2006 encouraged several banks to utilise Islamic financial instruments to fund infrastructure projects. Since 2006, seven sukuk with a value of US$5.8 billion have been listed on the Hong Kong Stock Exchange including two renminbi-denominated sukuk issued by Khazanah Nasional and Axiata. Hong Kong’s intention to develop itself as an Islamic financial hub in the East was first mooted in 2007 by the then Hong Kong SAR chief executive, Donald Tsang who identified the introduction and development of the Islamic bond market in Hong Kong as a key government initiative. In the same year, Hang Seng Bank launched Hong Kong’s first Shari’a-compliant retail fund.
In the following year, Hong Kong’s first Shari’a-compliant syndicated loan for Noble Group raised US$80 million. Hong Leong Bank became the first bank to launch Islamic banking in Hong Kong in 2008, offering innovative Shari’a-compliant wholesale and investment banking solutions. This was also the year that saw Polaris collaborating with DBS Group to start an exchange traded fund that tracked the MSCI Taiwan Islamic Index. The index contains about 60 stocks listed on the Taiwan Stock Exchange.
In 2009, the Hong Kong Monetary Authority signed a memorandum of understanding with Bank Negara Malaysia to promote Islamic finance. In Taiwan, the Taiwanese Stock Exchange Corporation established exchange-traded funds with Abu Dhabi Securities Market and the Dubai International Financial Center and established a Taiwan Shariah Index. China was admitted to membership of the Islamic Financial Services Board in 2009 and since then Islamic finance has been gaining prominence as a channel for the country to expand its economic influence.
A significant development came from Mainland China in October 2009. With encouragement from the China Banking Regulatory Commission (CBRC), Ningxia Hui Autonomous Region took the lead in spearheading Islamic financial ervices in China. Ningxia, in the north-west of China, is an autonomous region where 35% of the population is Muslim. Bank of Ningxia became the first bank with Islamic finance windows to offer Islamic banking services in Mainland China. However, the Islamic finance windows at Bank of Ningxia are currently offering basic Islamic banking services containing safe custody current account, Restricted Investment Account (mudaraba), and cost-plus (murabaha).
In 2011, Khazanah Nasional, the investment holding arm of the Malaysian government, succeeded in issuing Hong Kong’s first yuan-denominated sukuk of 500 million yuan. This was also the first sukuk issued in RMB. The issuance attracted investors from Malaysia, Singapore, Hong Kong, the Middle East and Europe. In the subsequent year, Malaysian telecommunication firm, Axiata, launched the first corporate yuan sukuk in Hong Kong, raising 1 billion yuan. In the same year, Bank Muamalat Malaysia and Bank of Shizuishan of China agreed to offer Islamic banking products through the Chinese bank branch network of 23 branches.
An ordinance was passed by the Hong Kong government in 2013 to create a level playing field for Islamic finance through equalising the tax treatment of sukuk with conventional bonds. The Loans (Amendment) Bill 2014 followed the introduction of the Inland Revenue and Stamp Duty Legislation (Alternative Bond Schemes) (Amendment) Ordinance 2013. Hong Kong once again made headlines in 2014, when it successfully raised US$1 billion sukuk with a 5-year tenor, making the world’s first dollar-denominated sukuk originated by an AAA-rated government. This reaffirmed the city’s ongoing commitment to develop itself as a regional hub for Islamic finance. Also in the same year, RHB Asset Management launched an Islamic fund for public investors whilst the RHB Capital (RHB Banking Group) expressed its intention to establish an Islamic banking operation in Hong Kong and China.
Ningxia Halal Food International Trade Certification Centre became the first halal certification body in China with the approval of the Certification and Accreditation Administration of the People’s Republic of China. Chinese consumers spending on food and beverage is projected to grow by a Cumulative Annual Growth Rate (CAGR) of 11% to reach US$1.5 trillion by 2020. Of this aggregate, China’s estimated 26 million Muslims contributed around 0.1% or $10 billion, according to estimates released by the State of the Global Islamic Economy 2015/16 report.
In the following year, Qatar International Islamic Bank (QIIB) and QNB Capital signed an agreement with Chongqing- based Southwest Securities to develop Shari’a-compliant financial products. Besides helping Southwest Securities to access investor markets in Qatar and the Middle East, the agreement would allow QIIB and QNB Capital access to the Chinese market for financing and investments. In addition, the Industrial and Commercial Bank of China – China’s largest bank by assets, signed a deal with the Islamic Development Bank (IDB) to develop Shari’a-compliant banking products in China and the 52 IDB member countries.
In early January of the same year, the Chinese government announced plans to accelerate 300 infrastructure projects valued at US$1.1 trillion or 7 trillion yuan. This bodes well for the sukuk market as sukuk are seen as well-suited for infrastructure financing. To further promote Islamic finance in the country, the China Islamic Finance Club in Beijing was established by Zishang. This is the first platform for various agencies from China and the Middle East to cooperate in Islamic finance.
The 1st China-UAE Conference on Islamic Banking and Finance was held in 2016 under the theme ‘Islamic Banking and Finance: Perspectives, Challenges and Sustainable Impact’, and organised by Hamdan Bin Mohammed Smart University’s (HBMSU) Dubai Centre for Islamic Banking and Finance and Dubai Islamic Economy Development Centre (DIEDC). This conference was organised in cooperation with China Islamic Finance Club and ZhiShang Intercultural Communication, in partnership with Thomson Reuters. The event gathered senior decision-makers, experts, leaders, and researchers specialising in Islamic banking and finance from the UAE and China to discuss current emerging trends and challenges in the industry today as well as tackle joint collaborative opportunities to globally promote Islamic economics to the “one Belt one Road strategy”.
CHINA GEARS UP FOR ISLAMIC FINANCE
Islamic finance has the potential to contribute to China’s economic plans in several dimensions. Its emphasis on asset-backed financing and risk-sharing feature means that it could provide support for small and medium–sized enterprises, as well as infrastructure projects. Based on the principles of risk-sharing, Islamic finance poses less systemic risk than conventional finance. However, various challenges still need to be addressed before the true potential of Islamic finance industry in China can be fully realised.
As Islamic finance industry is not meant to serve only Muslims, measures to attract non-Muslims is required in order to gain a larger foothold in the country. Given the country’s 1.3 billion population and with recent approval of 300 infrastructure projects; the growth potential of Islamic finance in China is huge as the projects are valued at US$1.1 trillion or 7 trillion Yuan.
While China recently, allowed local governments to sell bonds directly to refinance debt following a two-decade ban, the country will need to make more regulatory changes to promote Islamic finance. First and foremost, Islamic finance should be on an equal footing with conventional finance in China. Local laws and tax regulations need to be modified to permit Shari’a-compliant investments. This requires cooperation between central and local government.
China is a huge nation that has been experiencing unprecedented growth over the past few decades – an average annual GDP of well over 10%. As China turns to Islamic finance to expand its economic clout, the “One Belt, One Road” could be the much needed boost for Islamic finance. In the very famous words of Napoleon Bonaparte:
“China is a sleeping giant. Let her lie and sleep, for when she awakens she will astonish the world.”
“China is a sleeping giant. Let her lie and sleep, for when she awakens she will astonish the world.”
Napoleon Bonaparte
