By Arno Maierbrugger/Gulf Times Correspondent /Bangkok
China-led Asian Infrastructure Investment Bank, or AIIB, a new development financing body for Asia to be launched early next year and sometimes seen as a rival to the Japan-US dominated Asian Development Bank, is planning to use Hong Kong as financing hub and for the issuance of sukuk for large development projects, according to John Tsang Chun-wah, financial secretary of the Hong Kong Special Administrative Region government.
Tsang said that the development bank, which will have a registered capital of $100bn, was a “golden opportunity” for Hong Kong as the city had “an edge over other places because of its sound financial system and experience in developing Islamic bonds.”
While the AIIB is no Islamic financing body per its definition, the asset-backed nature of sukuk makes them ideal for long-term infrastructure investments along what China defines as the New Silk Road across Central Asia and the new Maritime Silk Road, a shipping route linking the South China Sea with the Arabian Gulf, as opposed to conventional loans. To that end, the AIIB has already held meetings with Jeddah-based Islamic Development Bank (IDB) to study the use of Islamic financing as China acknowledges that sukuk have gained prominence as funding tools for a range of countries in recent years, and among multilateral lenders to help fund some of Asia’s mounting infrastructure needs.
A potential link-up between the IDB and AIIB, which have 20 member countries in common, is also on the cards, which would give China access to a large capital pool in the Middle East and Southeast Asia.
Hong Kong puts itself indeed forward for becoming China’s future Islamic finance hub. The special economic region kicked of the development of an Islamic bond market as a government initiative as early as 2007. A first landmark Islamic bond was issued in September last year at a volume of $1bn, and a second sukuk issued in May 2015 raised the same amount. The city was the first AAA-rated government to issue a US dollar-denominated sukuk and followed London in seeking to boost its Islamic finance credentials to lure investors from the Middle East and Southeast Asia. The sukuk were both assigned credit ratings of AAA by Standard & Poor’s as well.
“The two sukuks were very successful and acquired multiple rates of over-subscription,” Tsang said. “Many countries along the Silk Road Economic Belt are Islamic countries. They might prefer sukuk rather than ordinary debts in financing methods.”
The first country where AIIB funds will be used is the China-Pakistan Economic Corridor (CPEC) project, an extension of the New Silk Road. The CPEC includes the construction of roads, railways, pipelines and industrial zones on the route from Gwadar Port in Balochistan, just off the southern tip of the Arabian Gulf, to Xinjiang province on China’s western frontier, about 3,000km away. This June, Pakistan’s Finance Minister Ishaq Dar signed the agreement to back the AIIB – and benefit from its funding.
“The AIIB has been especially created to serve the needs of infrastructure funding in the region,” Dar said, adding that he believes Pakistan could draw financial support for communications and energy infrastructure projects including projects for construction of roads, dams and power generation from the new development bank.
Besides Pakistan and the three Muslim-majority G20 members Saudi Arabia, Turkey and Indonesia, the AIIB counts other Muslim countries such as Kazakhstan, Qatar, Jordan and Oman as founding members. All have issued or have plans to issue sovereign sukuk.