China Islamic bond push renews as global-focused funds quadruple

A Chinese company plans its first dollar sukuk issuance to tap a four-fold increase in Chinese funds that can invest in bonds overseas. A sukuk is a type of bond consistent with the Islamic faith.

Sichuan Development Financial Leasing Co plans to sell $300 million of Islamic bonds via the Singapore-based special purpose vehicle, Silk Routes Capital Pte, in December, according to Silk Routes Financials, which is the financial adviser on the sale. The deal is being done in the city-state because China doesn't have equal tax treatment for sukuks, said Bobby Tay, an adviser at the consultancy.

The planned offering follows China's inaugural ringgit sukuk by Country Garden Holdings Co last year. The support for Islamic finance complements President Xi Jinping's Belt and Road Initiative goal of reviving historical trade routes with the Middle East. Research firm Z-Ben Advisors estimated Chinese funds that invest in bonds overseas through the nation's Qualified Domestic Institutional Investors program more than quadrupled this year to 17.4 billion yuan ($2.6 billion) as of Sept 30.

"This is a step in the right direction and could potentially lead to more Chinese corporates diversifying their funding sources via the sukuk market," said Hasif Murad, an investment manager at Kuala Lumpur-based Aberdeen Islamic Asset Management. "The predominant interest for this issuance will come from yield-hungry domestic Chinese investors."

Silk Routes Capital hired Standard Chartered Plc, CIMB Group Holdings Bhd, Bank of China Ltd and Bank of China International Ltd to help arrange investor meetings in the Middle East, Malaysia, Brunei, Singapore and Hong Kong, Tay said. The sukuk will use the structure of commodity murabaha, where goods are bought and then resold with a pre-agreed mark-up, he said.

The Islamic debt will likely have the same ratings as Sichuan Development Holdings Co, the parent of the leasing company, according to Tay. The investment arm of Sichuan provincial government is rated A-by Fitch Ratings. Officials in the two companies couldn't be immediately reached by phone.

In a sign the traditional Silk Road is coming back to life, Chinese companies are building roads, railways and ports along the route to the Middle East, Africa and Europe. The first cargo train from China to Afghanistan completed its journey in September, marking another advance in Xi's project to deepen his nation's influence along the old trade routes.

Issuance of global Shariah-compliant securities climbed 28 percent so far this year to $38.7 billion, after dropping 28 percent to $35.6 billion in 2015, the lowest level since 2010, according to data compiled by Bloomberg.

Bloomberg