Hong Kong: As Hong Kong readies a second sovereign Islamic bond sale, its goal of becoming a Sharia-compliant financing hub for Chinese companies remains elusive.
The Hong Kong Monetary Authority announced plans this week to sell $1 billion (Dh3.67 billion) of five-year sukuk, the same size and tenor as its debut issue in September that drew $4.7 billion of bids. Those notes last yielded 2.06 per cent, almost the same as the rate at issue and about twice the level of the government’s similar-maturity non-Islamic securities.
Hong Kong is vying with cities including London and Singapore to be a hub for the global Islamic finance industry, whose assets are forecast by Ernst & Young LLP to double to $3.4 trillion by 2018 from 2013. While the city government’s AAA- rating will ensure demand, Hong Kong is unlikely to host any corporate offers in the next one to two years as sukuk is seen as an “exotic instrument,” said Sergey Dergachev, a portfolio manager at Union Investment Privatfonds GmbH.
“It’s a journey for companies to tap the Islamic finance market as the Sharia concept is still a novelty there,” said Nik Norzrul Thani, chairman of Kuala Lumpur-based law firm Zaid Ibrahim & Co. “We have some enquiries from Chinese companies based in Hong Kong on the possibility of selling sukuk.”
Narrow spread
HKMA’s second offer should be well received given the oversubscription rate for Malaysia’s dollar sukuk last month, Nik Norzrul said. There were $9 billion of bids at that sale, compared with the $1.5 billion of 10- and 30-year notes sold.
Hong Kong will probably pay about 1.85 per cent on the five- year sukuk, Union Investment’s Frankfurt-based Dergachev said in an email interview on Tuesday. That would compare with the 2.005 per cent profit rate at its debut sale, which was 23 basis points above similar-maturity US. Treasuries, according to a Sept. 11 government statement. That was the narrowest spread ever achieved on a benchmark dollar issuance from an Asian sovereign outside of Japan, according to the statement.
The main objectives of Hong Kong selling sukuk are to demonstrate that the legal framework for issuance in the city is widely accepted internationally and to attract more issuers and investors to the local market, the HKMA said in an emailed response to questions on Wednesday, declining to give a time frame for the sale.
Competing hubs
The city has been trying to develop an Islamic financial market since as far back as 2007, with Airport Authority Hong Kong announcing the following year that it was looking to sell as much as $1 billion of sukuk, an offer that never eventuated.
“I hope that the sukuk issuance will catalyse the further growth of the sukuk market in Hong Kong by encouraging more issuers and investors to participate in our market,” Financial Secretary John C Tsang said in the September 11 statement.
As Islamic finance begins to expand outside of its strongholds in the Middle East and Southeast Asia, a number of financial centers are hoping to lure Sharia-compliant debt sales. UK and Luxembourg sold their debut sovereign Islamic bonds last year. Singapore, which introduced equal tax treatment for sukuk in 2006, had attracted S$4.4 billion ($3.3 billion) of sukuk sales as of last October, according to data from the Monetary Authority of Singapore.
Those numbers still pale in comparison to neighbouring Malaysia, which accounted for 58 per cent of the $300 billion of total outstanding sukuk worldwide at the end of November, according to the Malaysia International Islamic Financial Centre. The Gulf Cooperation Council countries of Saudi Arabia, UAE, Kuwait, Qatar, Bahrain and Oman made up 30 per cent.
Excellent Infrastructure
The extent to which Hong Kong will be able to fulfil its Islamic finance ambitions will depend on whether the industry can gain traction in China. Ningxia, an autonomous region in northwest China, has said it’s considering a sukuk sale, while Qatar International Islamic Bank QSC signed an agreement last month with Chongqing-based Southwest Securities Co to develop Sharia finance products in Asia’s largest economy.
“Companies in Hong Kong and China can easily model their sukuk to that of Hong Kong’s government,” said Mohammad Azahari Kamil, chief executive officer of Asian Finance Bank Bhd in Kuala Lumpur. “I would expect more firms, especially the better quality ones, to tap the sukuk market as demand will be there given the bigger pool of investors.”
Hong Kong is one of the world’s major financial centres and the Bank for International Settlements ranked it as the fifth- largest currency trading hub in a 2013 survey. The city, which has a Muslim population of 270,000, changed its tax rules in July 2013 to put corporate sukuk sales on an equal footing with non-Islamic bonds.
“Hong Kong has very strong regulation and excellent infrastructure,” said Union Investment’s Dergachev. “There is huge scope for raising more investor awareness for sukuk in Hong Kong.”