As this year’s GDP growth of China, the world’s second largest economy and major manufacturing hub, is forecast to reach a 44-year low of just 2.5%, there is enough ongoing in the background to prepare for a post-coronavirus rebound.
One such sector bustling with activity is Islamic finance which has grown in importance in China since the country embarked on its multi-decade mega-investment and development program of the New Silk Road, officially known as Belt and Road Initiative, or BRI. The fact that China started pursuing BRI projects across Central and Western Asia brings with it that is has to deal with project financing in a number of predominantly Islamic countries, which, in turn, is expected to spur growth of the Islamic finance sector of the wider region despite a virus pandemic that will eventually be overcome.
“Some of the BRI projects will go through core Islamic finance countries and therefore likely will be financed in Shariah-compliant ways,” Mohamed Damak, global head of Islamic finance at S&P Global Ratings, said in an analysis of China’s BRI ambitions.
The BRI, launched by Chinese President Xi Jinping in 2013, is one of the largest infrastructure and investment projects in the world in history, covering so far around 70 countries, as well as 65% of the world’s population and 40% of the global GDP. China said it is ready to spend nearly $150bn a year in and together with the countries that have joined the initiative. Expanding across Central and Western Asia and eventually the Middle East, the BRI leads through many Islamic economies and jurisdictions that have a large base of Muslim consumers, so it is obviously advantageous for Islamic economy sectors, namely Islamic finance and halal trade, to join and contribute to the BRI.
On board are, among others, already a number of Islamic finance institutions, starting with the Islamic Development Bank which entered a cooperation with China-dominated Asian Infrastructure Investment Bank mainly to provide Shariah-based infrastructure financing for the BRI. The Industrial and Commercial Bank of China has opened a Shariah banking window tailored for BRI financing products, while Qatar National Bank and Qatar International Islamic Bank partnered with Chongqing-based Southwest Security to tap the capital market of the Gulf Cooperation Council (GCC) countries for Shariah-compliant BRI investments. Another major player, Chinese industrial conglomerate Hainan Group, has been issuing Islamic loans starting from 2015 and became the first corporation in mainland China to obtain financing through Islamic finance, with an initial focus on funding vessels for the maritime segment of the BRI.
As a result, Islamic finance has become a crucial element for the implementation of the BRI, and Islamic banks mainly from the Middle East and Southeast Asia have smelled the opportunity and began committing to investments not only in the BRI, but also in China directly after the country in the past years started amending banking regulations to facilitate the development of Islamic finance on its own soil.
This is a major step after China’s interest in Islamic finance grew after the 2008/09 global financial crisis, which triggered a debate also in China over the greater sustainability and norms of Islamic finance as compared to a vulnerable conventional finance sector prone to toxic loans, as well as the ethical principles of Islamic finance which appeal to a new type of responsible investors, be it private or institutional.
While most of the Islamic financing activity China’s is currently focused on projects outside the country, there is also development of the sector within China itself, albeit at a slower pace. Initiatives to launch Islamic banking operations date back to 2014 when Malaysia’s Bank Muamalat in cooperation with Bank of Shizuishan opened an Islamic banking window in China’s Ningxia province. Malaysia’s Affin Islamic Bank together with Hong Kong-based Bank of East Asia has been looking into the opportunity of launching Islamic banking services in Urumqi, the capital of Xinjiang.
Such efforts currently keep focusing on China’s Ningxia and Xinjiang autonomous regions which are home to a relatively large number of Muslims out of China’s estimated Islamic population of about 25mn. Yinchuan, Ningxia’s capital, has already turned into a base for financial cooperation between Beijing and GCC countries in terms of Islamic investments and has been earmarked to become a future Chinese Islamic financial center of international scope, potentially competing with Shanghai which has similar ambitions.
Experts say that there is great potential for Islamic finance for China not only with regards to international co-operations, but also on domestic soil – besides supplying its small Muslim population with Islamic financial services mainly to attract more Islamic investors from abroad by providing Shariah-compliant investment opportunities. The main issues to be resolved on the way, however, are a more intrinsic adaptation of China’s legal banking framework towards Islamic finance and also the provision of more qualified professionals in the sector, which requires intense training at global international Islamic finance centres, mainly in the GCC and Southeast Asia.
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