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Islamic finance is knocking on the doorsteps of China
The government has been taking the steps necessary to facilitate transactions in China and Hong Kong.
July 15, 2015: China is already an economic powerhouse and the world’s second largest economy full of highly trained mathematicians, business people, finance experts and millionaires. Anyone who gets off of an airplane in Shanghai will witness the booming economic miracle of China’s megacities full of a highly-educated populace ready to make their mark in the financial markets.
The launch of the Shanghai Free Trade Zone in 2013placed the city on the map of financial services. In addition, in 2011, Hong Kong was ranked number one in the World Economic Forum’s Financial Development Index, surpassing the USA and UK. Hong Kong is well-positioned for raisingcapital, product launch and distribution, and as a platform for specialised financial services. The People’s Republic of China has been taking the steps necessary to facilitate Islamic finance transactions in China and Hong Kong to prepare the country for competition in the sukuk, Islamic fundsand Islamic finance industries.
In addition, as of January 2015, the government had approved plans to accelerate 300 infrastructure projects valued at $1.1 trillion or 7 trillion Yuan. China is ripe for Islamic finance. In this momentous occasion in time, Islamic finance offers a unique opportunity for the Muslim communities of China to gain status and respect in a traditionally challenging atmosphere and teach other Chinese people, businesses, and the government how to increase their net worth and remain competitiveand reveal the correlation between the communal ideals of Confucianism and Islam.
In 2006, the Chinese banking sector was opened to foreign banks. In the same year, Bahrain-based Shamil Bank launched its $100 million Shamil China Realty Mudarabah. The four-year Mudarabah invested in the Xuan Huang China Realty Investment Fund, a joint venture between Shamil Bank and the state-owned Chinese Conglomerate CITIC Group. In addition, Deutsche Bank, through its global mutual fund arm DWS Investments, launched its first shari’ah compliant mutual fund capability in December of 2006, which was marketed as DWS Noor Islamic Funds and included the DWS Noor China Equity Fund.
In 2007, Chief Executive Donald Tsang Yam-Kuen introduced the idea of promoting Hong Kong as an Islamic financing hub. In addition, Hang Seng Bank launched Hong Kong’s first shari’ah compliant retail fund. In 2008, Hong Leong Bank Hong Kong launched its Islamic banking services. Also in 2008, Hong Kong’s first shari’ah compliant syndicated loan for Noble Group raised $80 million.
In Taiwan in 2008, Polaris collaborated 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. Polaris is the asset management unit of Polaris Financial Group, which owns Taiwan’s largest online brokerage.
In 2009, Hong Kong Monetary Authority (HKMA) signed a memorandum of understanding with Bank Negara Malaysia to promote Islamic finance. In 2009, the Taiwanese Stock Exchange Corporation established exchange traded funds with both the Abu Dhabi Securities Market and the Dubai International Financial Centre (DIFC) and established a Taiwan Shari’ah Index. Also in 2009, China became a member of the Islamic Financial Services Board (IFSB). In 2011, Khazanah, the investment holding arm of the Malaysian government, marketed Hong Kong’s first yuan-denominated sukuk of 500 million yuan, attracting investors from Malaysia, Singapore, Hong Kong, the Middle East and Europe.
In 2012, Malaysian telecommunications firm Axiata launched the first corporate yuan sukuk in Hong Kong, raising 1 billion yuan. Also in 2012, HKMA and Bank Negara Malaysia introduced a pilot scheme that allowed bonds to be traded and settled across the Malaysian and Hong Kong borders. In 2013, China approved Ningxia as an economic experimental zone for inland development, creating room for the introduction of Islamic finance in the country. In 2012, Bank Muamalat Malaysia and Bank of Shizuishan of China announced plans to establish an Islamic bank in Ningxia province. In addition, the two banks agreed to offer Islamic banking products through Bank of Shizuishan’s network of 23 branches. One-third of the population of Ningxia uses Shizuishan Bankwith assets of $3.9 billion and net profit of $42 million in June 2015. In addition, Bank of Ninxia established an Islamic Banking Unit, which has been in operation since 2009.
In 2013, Hong Kong enacted a law that equalised 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. In 2014, Hong Kong raised $1 billion in a sukuk issuance, making the world’s first dollar denominated sukuk originated by an AAA-rated government. Also in 2014, RHB Asset Management launched an Islamic fund for public investors and Affin Bank and Bank of East Asia announced plans to establish an Islamic bank in the People’s Republic of China. In addition, RHC Capital (RHB Banking Group) expressed a desire to establish an Islamic banking operation in Hong Kong and China.
Since 2006, seven sukuk with a value of $5.8 billion have been listed on the Hong Kong Stock and two renminbi-denominated sukuk by Khazanah National and Axiata. Riding on the sukuk momentum, after Hong Kong’s debut $1 billion sukuk, the government of Hong Kong announced another $1 billion sukuk offering. In addition, Ninxia Province plans a $1.5 billion debut sukuk sale in 2015/2016.
Qatar International Islamic Bank (QIIB) and QNB Capital signed an agreement in April 2015 with Chongqing-based Southwest Securities to develop shari’ah compliant finance products. In addition, Industrial and Commercial Bank of China, which is China’s largest bank by assets, signed a deal with Islamic Development Bank (IDB) to develop shari’ah compliant banking products in China and the 52 IDB member countries. Gulf Finance House plans to invest at least $1 billion in Chinese infrastructure projects.Al Rajhi Investments (ARII) introduced shari’ah compliant investments in the Chinese market through its Shari’ah Investment Fund (SAIF) in partnership with China Resources (CRC).
There are plans to develop a Ninxia Islamic Finance Center in the province’s capital Yinchuan, establish Islamic banks and banking products in China, and develop a wholesale Islamic capital market, including Islamic bonds, equities and funds.It seems apparent that the time for Islamic finance and China is now.
Camille Paldi is CEO of Franco-American Alliance for Islamic Finance
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