China is one of the strongest and fastest growing economies in the world, as confirmed by the 2006 figures released on 25 January 2007. These figures from the National Bureau of Statistics confirmed that the country has continued on its growth track of over 10% growth for the last four years by registering a 10.7% growth in 2006, surpassing the 10.5% predicted by officials. This most recent rise is credited primarily to investments and exports.
Notwithstanding this growth, a large number of investors complain about the lack of transparency in China and the language barrier creates another difficulty. Other problems for investors include the different business culture, corruption and inconsistent law enforcement.
Opening Up To the World
On 11 December 2006, the Chinese banking sector was opened up to foreign banks. Significantly, this took place on the day after the deadline of the country’s promise to open all types of renminbi banking business to foreign investment made by China to the World Trade Organization back in 2001.
Song Dahan, deputy director of the Legislative Affairs Office of China’s State Council, said at the press briefing of the launch: “The government will also remove regional restrictions and other limits on foreign-funded banks, giving them the same treatment as Chinese banks.”
The China Banking Regulatory Commission (CBRC) introduced new regulations to lift restrictions on renminbi and foreign currency transactions by solely foreign-funded banks and Sino-overseas joint venture banks. The regulations also apply to financial institutions registered in Hong Kong, Macau and Taiwan. Chinese branches of foreign banks, however, are banned from engaging in renminbi services with Chinese citizens unless an individual, having obtained the approval of the banking regulatory body, makes a fixed deposit of no less than 1 million yuan (US$128,695).
Solely foreign-funded banks and joint venture banks must have a minimum registered capital of 1 billion yuan (US$128.6 million) or the equivalent in foreign currency. Chinese branches of foreign banks must have a minimum operating fund of 200 million yuan (US$25.7 million) or the equivalent in foreign currencies. Foreign financial institutions who apply to set up solely-owned banks in China must have had no less than US$10 billion in total assets at the end of the previous year. Foreign banks who apply to set up branches must have had no less than 20 billion yuan (US$2.57 billion) in total assets at the end of the previous year. This new regulation has replaced the older version of the Administrative Regulation on Foreign-funded Financial Institutions, which was introduced five years ago.
Although there are already more than 70 foreign banks operating within China, their market impact is negligible; they simply have no volume since they are operating as foreign banks.
The new regulations stipulate that the registered capital requirement for a locally-registered, foreign-funded bank and the working capital requirements for its branch will be consistent with those requirements set forth for Chinese domestic banks. Parent banks of a locally-registered, foreign-funded bank are now allowed to set up a separate account branch in China – in case it is a large-scale international bank and has large numbers of multinational clients needing to carry out capital transactions globally – within a certain period approved by CBRC. The business scope of such separate account branch will be limited to foreign exchange loans and other related business.
According to CBRC: “As an integral part of China’s national economic reform and opening up as well as a natural outcome of China’s increasing integration into the world economy, the opening up of the Chinese banking sector is instrumental in promoting the banking industry reform and thereby improving the competitiveness of China’s banking sector as a whole. The Chinese government attaches great importance to the banking sector opening up, and is committed to promoting the banking industry reform and opening up concurrently, and at the same time strengthening the supervision and improving the services quality. It is the government’s conviction that strengthened supervision and improved services will pave the way for further opening up.”
CBRC data shows that assets of foreign-funded banks in China totalled US$105.1 billion as at September 2006, accounting for 1.9% of the total for all banking institutions in the country. Since 2001, China has taken a series of measures to gradually open its financial markets, including the introduction of the QFII (qualified foreign institutional investors) scheme in 2003 to allow foreign institutional investors such as UBS, Deutsche Bank and Citigroup Global Markets to engage in the securities sector on the Chinese mainland.
In order to cope with competition from foreign banks, the country has initiated reforms of its state-owned banks which had high non-performing loan (NPL) ratios. The big four banks in China are the Industrial and Commercial Bank of China, the Bank of China, the China Construction Bank and the Agricultural Bank of China. They were forced to take active measures to enhance their competitiveness, focusing on reducing their average non-performing loan (NPL) ratio to less than 15% by 2005. The four banks now hold more than 65% of domestic market shares, and three of the four are now listed on the stock market.
Do Islamic Finance Players Have a Place in China?
Given all of these developments, the issue is whether Islamic finance players have a place in China. Some moves to test the Chinese waters are already evident, although not necessarily directly in the banking sector.
The year 2006 started with Bahrain-based Shamil Bank launching its US$100 million Shamil China Realty Mudarabah. This was the first-ever Islamic property fund for investment in the Chinese real estate market. The four-year Mudarabah invests in the Xuan Huang China Realty Investment Fund, a joint venture between Shamil Bank and state-owned Chinese conglomerate CITIC Group. The fund undertakes Shariah-compliant, high quality investments in land development projects, residential, commercial and industrial properties. Institutional investors and high net worth individuals in the GCC were the target.
Deutsche Bank, through its global mutual fund arm DWS Investments, launched its first Shariah-compliant mutual fund capability in December. Within this range – marketed as DWS Noor Islamic Funds – it includes the DWS Noor China Equity Fund.
Another player is Gulf Finance House (GFH), which plans to invest at least US$1 billion in China. Esam Janahi, CEO of the Islamic finance house, stated that the bank is seeking to establish direct investments in infrastructure projects through the development of business hubs for energy companies, ports or roads in the country. Esam also added: “If you look at the growth in the utilisation of energy over the next five years, most of it comes from China and India. You have to be part of that market.”
December witnessed Al Rajhi’s foray into China. Al Rajhi Investments (ARI), part of Sheikh Sulaiman Al-Rajhi group of companies in Riyadh, introduced Shariah-compliant investments in the Chinese market through its Shariah Investment Fund (SAIF), in partnership with China Resources (CRC). The latter is a central government-owned conglomerate and, through its holdings in China Vanke and CR Land, is recognised as a dominant investor and developer in the country’s property market.
SAIF aims at development and asset repositioning projects in the Chinese real estate market, with a total equity capitalisation target of US$500 million. Both CRC and ARI have committed to invest US$100 million in the Islamic fund.
“Real estate is the first of the markets to be targeted, but with the broad range of industries in which both China Resources and Al Rajhi operate, this partnership forms a solid foundation for future investment opportunities across a wide range of industries,” Charley Lin Song, president of China Resources, commented.
China is by far the fastest-growing energy consumer in the world and energy is perhaps the single most crucial issue for the country. Because of this, the strategic importance of a more intimate relationship with the Gulf region for China cannot be under-emphasised. This may mean that the country is ripe for Islamic investors from this region to move in.