IB&F spoke to by Prof. K.C. Chan, Secretary for Financial Services and the Treasury, Hong Kong Special Administrative Region, at the Asian Financial Forum 2016 about Hong Kong's continued interest in becoming a hub for Islamic financial activity and Sukuk issuance

With so many financial centres around the globe interested in becoming more active in Islamic finance, Hong Kong is looking to leverage its many established strengths to increase its own activity in the space as well as attract more activity to the special administrative region.

Hong Kong is not new to Islamic finance. In 2015, the HKSAR Government made its second foray into the world of Sukuk. The 2015 Sukuk, with an issuance size of $1 billion and a tenor of five years, was also issued in US dollar, much like the previous Sukuk issued by the HKSAR Government, its inaugural issuance made in September 2014.

Last year also saw Hong Kong reaching out to the rest of the Islamic financial world as well. Following a global roadshow commencing 18 May 2015, covering Riyadh, Jeddah, Dubai, Abu Dhabi, Kuala Lumpur, Hong Kong and London, the Reg S US dollar Sukuk was priced on 27 May 2015 at 1.894 per cent (35 basis points over five-year US Treasuries).

The global Islamic finance world responded to that openness in kind. The Sukuk received warm welcome from global investors, attracting orders of $2 billion, which was two times the issuance size. Despite the volatility observed in the international bond market and the large movements of sovereign bond yields within a short period of time, benefitting from the investor confidence in Hong Kong's credit strengths and the strong demand for high quality Sukuk, the final pricing was set at the tight end of the initial price guidance. The cost of funding was at a very low level of 1.894 per cent, which was lower than that for the inaugural Sukuk issuance in 2014.

The deal attracted interest from a diverse group of conventional and Islamic investors. Orders were received from 49 global institutional investors, and 42 per cent of the Sukuk were distributed to the Middle East, 43 per cent to Asia and 15 per cent to Europe. By investor type, 77 per cent was distributed to banks, private banks and fund managers, and 23 per cent to sovereign wealth funds, central banks and supranationals, according to the Hong Kong Government.

Though Hong Kong has yet to issue another Sukuk since then, now more than a year later, Hong Kong has not abandoned Islamic finance. "We are very interested in developing an Islamic finance platform here in Hong Kong," said by Prof. K.C. Chan, Secretary for Financial Services and the Treasury, Hong Kong Special Administrative Region, to Islamic Business & Finance. "It's not because Hong Kong has a good-sized Islamic population. The reason is that we believe that Islamic activity is a major part of the international financial world. Islamic finance assets are a good percentage of the international financial assets. In order for Hong Kong to be a comprehensive financial centre, Hong Kong would like to offer Islamic financial products. That is the reason that we are interested in it."

Hong Kong has worked to make sure Islamic finance operates on an even playing field in the special administrative region. "We have actually changed our tax law in Hong Kong so that when an issuer issues certain financial products, those financial products from a tax standpoint will be treated very much like conventional bonds. There is no longer any disadvantage for the issuance of Islamic products in Hong Kong. In the tax area, we have levelled the playing field so that Islamic financial products can evolve in Hong Kong without any kind of tax disadvantage," said Chan.

Chan also highlighted the aforementioned Sukuk's issuance's rationale, as well as the strengthened ties that issuances created with Dubai."The Hong Kong Government also issued two Islamic products in the last two years to demonstrate how you can use the existing institutions of Hong Kong and legal framework to issue Islamic financial products. Those Sukuk were also listed in the Dubai exchange to show how this can create a global exchange."

Hong Kong's interest in Islamic finance is also tied to broader China's One Belt One Road initiative, which is an effort to strengthen Hong Kong and China's economic ties with its historical 'silk road' partners across Eurasia. "We will continue this effort. We believe that with the One Belt One Road initiative, there will be more opportunities to issue Islamic financial products for many different kinds of investments. We are very interested in continuing our work of attracting those issuances in using our platform.

"With the One Belt One Road initiative, there will be an increasing need to develop Islamic products. As we see the renmibi [RMB] become more internationalised in the future, we will find that the Islamic products could be denominated in RMB. That will not happen right away, but we feel that will be something possible to develop in the future. We just want to make sure that we are ready," said Chan.

Chan also highlighted Malaysia's strength in the space, and Hong Kong's strong ties with the country in terms of Islamic finance and more. "We have a very strong relationship with the Bank Negara Malaysia, and we have participated in a number of forums in Malaysia. I believe that many of the people working on Islamic financial projects in Hong Kong also have ties to Malaysia. Some of the Malaysian banks operating in Hong Kong are also working on these projects. We definitely have a strong and friendly relationship with Malaysia."

Though Malaysia remains strongest, that does not mean that Hong Kong does not have a lot to contribute potentially to the Islamic economy. "As I said earlier, Hong Kong does not have an Muslim population. The thing about the Muslim population in Asia is that Malaysia is the foremost Islamic financial centre. In our own consideration, we believe Hong Kong does possess many advantages, starting with the fact that Hong Kong is a very well developed international financial centre. We have a set of rules and regulations and laws understood by international investors. When we talk about Muslim financial products, many are invested in by the non-Muslim population. It's not just an Islamic population investing in an Islamic product--it's more diverse. that is why a city like London is developing an Islamic financial platform. We want to be a comprehensive platform and be able to offer those services."

Chan did, however, question to what degree they will succeed with that initiative. "Will there be enough demand? That is an open question. We think that Hong Kong is a good centre to issue Islamic products. that is why we try to put ourselves in that position to demonstrate we can do that. We realise that there are many choices of where one can issue Islamic products, but we have enough capabilities to offer this, and view ourselves as a good choice."

In terms of further Sukuk issuance, the answer is still vague. "We're still reviewing things. There is nothing definite. We're just reviewing our strategy."

© Islamic Business and Finance 2016