The Silk Road Economic Belt and 21st Century Maritime Silk Road, or, in short, the One Belt, One Road (OBOR) initiative, has become one of the hot topics of 2016 and is central to China’s evolving role in the global economy.
OBOR, unveiled in 2013, is China’s ambitious policy of revitalising the infrastructure of the ancient Silk Road trading routes and forging new trade routes through investments in roads, high-speed railways and ports and promoting new business opportunities, connectivity and economic cooperation with countries across Asia, the Middle East, Europe and Africa.
OBOR offers great opportunities for the GCC in terms of inbound investments from China as well as the chance to deepen economic, cultural and diplomatic ties with Beijing. China already has strong links with Iran, which are being further reinforced though OBOR. In this context, it is of great importance for the Gulf States to embrace this golden opportunity to develop and diversify their trade and economic relations with China, beyond oil and gas, particularly at a time when they are facing the prospect of increased competition from across the Strait of Hormuz in satiating China’s energy security needs.
This is a time for the GCC to be as inventive and persuasive as possible in what they can offer to China to remain relevant in the New Silk Road, by leveraging their existing comparative advantages to deepen ties with China. For the UAE, particularly against the backdrop of the upcoming the Dubai Week event in Shanghai taking place from October 27 to 29, showcasing Dubai’s ability to provide China with a gateway to accessing regional liquidity and its locally based expertise in Islamic finance might just be two such advantages.
The UAE, through Dubai, is already recognised as a regional financial hub for the Middle East, North Africa and sub-Saharan Africa. It has also made great strides in the past ten years towards achieving its target of becoming the capital of the global Islamic economy. Already, Dubai, through Nasdaq Dubai, has overtaken Malaysia and London as the world’s leading centre for international sukuk listings. The UAE’s banks (both conventional and Islamic) are also some of the best capitalised in the Middle East.
Islamic finance is gaining prominence as a channel for China to expand its economic influence abroad (as Chinese domestic banks continue to develop their overseas businesses and outbound investments) and strengthen ties with Muslim majority countries, and as a means for Chinese entities to raise financing offshore through previously untapped markets. To put things into context, the value of assets held in Sharia compliant financial institutions is currently estimated as representing approximately 1 per cent. of total world assets (about US$2 trillion) and the value of the global Islamic financial market is expected to increase to around US$3 trillion by 2020. China wants a slice of this pie and Dubai is one of the best equipped financial centres in the world to provide it.
In the past two years, Agricultural Bank of China, Bank of China and Industrial and Commercial Bank of China have issued conventional bonds listed on NASDAQ Dubai, reflecting their appetite to expand business in the Middle East and benefit from growing trade and investment ties between China and the Gulf. The expectation (and hope) is that sukuk issuances by Chinese state-owned enterprises and private companies will follow in the not too distant future and Dubai will be ideally positioned to act as the hub through which both Islamic and conventional investments into China can be routed from the wider Gulf region.
Through OBOR, which is overseen by China’s National Development and Reform Commission, Ministry of Commerce and the State Council, China is, among other things, taking a significant step on the path to using Islamic finance to build business relationships and foster increased cooperation on projects with the Middle East and the Muslim majority South East Asian countries. China has already taken steps to establish its outbound Islamic financing framework and develop enterprises which provide Islamic financing products in order to participate in investment in these regions. At the government level, initial Chinese participation in Islamic finance may be via the Asian Infrastructure Investment Bank (AIIB), the Beijing backed new entry to the multilateral lender club, which presents an alternative to the International Monetary Fund and World Bank in the regional infrastructure development space. The AIIB has already been in discussions with the Saudi Arabia-based Islamic Development Bank on Islamic financing projects across the Middle East and Southeast Asia.
For the moment, however, such plans are just that, and there are clear speedbumps on the New Silk Road so far as Chinese use of Islamic finance is concerned, not least the primary stakeholders’ (being Chinese regulators, banks, prospective issuers and the AIIB) lack of familiarity with Islamic finance principles and structures, which are typically more elaborate than conventional (at least, non-structured) finance. Moreover, constraints arising out of current policies and laws have an impact on China’s development of and access to Islamic finance and, in particular, sources of Islamic capital overseas. The unique nature of Islamic finance, primarily being financing structures which utilise offshore securities issuance vehicles and the transfers of assets and/or investments in assets to generate returns, cannot be easily reconciled at present with the existing apparatus of state and the current Chinese legal and tax framework which, in the finance space, essentially only caters for conventional financing methods.
Before Islamic finance can truly pick up speed in China, Chinese stakeholders (like their counterparts in other jurisdictions that have ventured into the realm of Islamic finance, including the United Kingdom and, closer to home, Hong Kong, have done) must get to grips with the rules and principles on which this alternative form of financing is built. This could begin with Chinese government authorities and regulators consulting with or attending teach-ins provided by Islamic finance experts in order to develop their understanding of such products, and potentially culminate in (as has been the case in other jurisdictions) amendments to local policies and laws (such as the laws regulating foreign ownership of assets, foreign investments and foreign exchange) to recognise Islamic finance as an alternative to traditional bonds and loans.
Dubai, as the emerging capital of the global Islamic economy and host to numerous international and local banks, law firms, Sharia advisory houses and a listing venue well versed in Islamic finance, can offer China not only access to alternative capital but also the experience, expertise and connections necessary to allow both Chinese government entities and private sector players to understand and access this still novel (from a Chinese perspective) form of finance.
It is difficult to speculate on how long it might take for Islamic finance to fully take flight in China (if ever), particularly given that any participants in such endeavours will invariably need to navigate China’s vast bureaucratic machinery. However, given that China has, through OBOR, expressed a willingness to partake in Islamic finance initiatives, Dubai must not let slip this chance to further demonstrate its relevance to China’s grand plans and help strengthen the UAE’s relations with one of its most important trade partners.
The Dubai delegation’s visit to Shanghai later this month, and other similar exchange initiatives in the future, represent unmissable opportunities for Dubai to showcase its financial clout and expertise and help establish its position as a vital waystation on the New Silk Road.
The author is a Partner at White & Case in their Dubai office.
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