China, the second-largest economic power in the world with a 20 million Muslim population, still shows great prospects in terms of Islamic finance and the Halal economy in the early 2020s despite the impact of the COVID-19 pandemic. Although Islamic banking, Takaful and other Islamic finance activities have been progressing slowly in the ‘Kingdom of the Dragon’, Sukuk is a potential sector that will soon make some breakthrough.
Given China’s strong economic ties with the Islamic nations, the Halal economy has been flourishing with a very good shape in terms of volume and influence.
Review of 2021
Bond Connect plays the main role in Sukuk opportunities for Chinese investors. In September 2021, the People’s Bank of China (PBOC) announced the launching of the ‘Southbound Link’ (SBL) of Bond Connect.
The annual total quota of the SBL is CNY500 billion (US$78.2 billion) equivalent, and the daily quota is CNY20 billion (US$3.13 billion) equivalent. The PBOC adjusted the annual total quota and daily quota of the SBL based on the cross-border capital flow situation. Domestic investors who meet the requirements of the PBOC can invest in bonds through the SBL.
The target bonds are all bonds issued overseas and traded in the Hong Kong bond market including Sukuk. At the initial stage, the SBL first opened spot bond trading. The SBL adopts the international nominal holder system arrangement.
The scope of domestic investors is tentatively designated as primary dealers for some open market businesses approved by the PBOC. Qualified domestic institutional investors and renminbi qualified domestic institutional investors can also conduct overseas bond investments through the SBL. Domestic investors are not allowed to illegally arbitrage foreign exchange through the SBL.
Domestic investors who use the renminbi to invest in foreign currency bonds can handle foreign exchange fund conversion and foreign exchange risk hedging services through the interbank foreign exchange market. If domestic investors no longer invest after the maturity or sale of the investment bonds, the relevant funds should be remitted to the country and converted back to the renminbi.
The SBL will help improve the institutional arrangements for the two-way opening of China’s bond market and further expand the space for domestic investors to allocate assets in the international financial market. The SBL will also help consolidate Hong Kong’s connection with the mainland.
Preview of 2022
The close ties of China and Indonesia in terms of Islamic finance and the Halal economy will be the main story in the coming year. China has a dominant position in the export market of Islamic clothing and other equipment needed by Muslims. The partnership between Indonesia and China is strategic and comprehensive. In 2022, the total trade volume between the two countries is estimated to reach US$80 billion.
The spending of the Indonesian Muslim community reached US$228 billion in 2020 and it is estimated that global Islamic spending will reach US$2 trillion in 2022.
The aforementioned figures show the huge potential of the world’s largest Muslim population and the challenges associated with the Islamic economy. The trade relationship between China and Indonesia has been going on for hundreds of years due to seasonal and regional differences.
In 2020, the trade volume between Indonesia and China was nearly US$78 billion, making China the largest trading partner for Indonesia. In general, China is the main trading partner for the ASEAN countries, while Indonesia’s trade volume ranks only fourth.
Given the continuous economic growth of China amid the COVID-19 pandemic and its excellent control measures, Islamic finance and the Halal economy are positively developing under the latest Bond Connect regime and the close economic ties with Indonesia in terms of Halal products.
Wafee Yeung is the managing director of Allalah Consulting and the director of the Hong Kong Centre for Islamic Finance. He can be contacted at [email protected]