Chinese companies tap into Malaysia's Islamic finance market

KUALA LUMPUR - Raising funds through Sukuk in Malaysia has been gaining traction among Chinese corporations. Over the last two weeks, Chinese corporations are seen raising funds through the Islamic bonds in Malaysia, which has positioned itself as Islamic funds hub.

Last week, China-owned Edra Power Holdings' solar energy unit Tadau Energy announced it had issued up to 250-million-ringgit ($58.36 million) Sustainable Responsible Investment Sukuk, the first green Sukuk issued in Malaysia.

Two weeks ago, Chinese Beijing Enterprises Water Group's subsidiary BEWG Malaysia made its debut in the Malaysian Sukuk market by issuing 400-million-ringgit Islamic medium term notes, the first-ever ringgit denominated Sukuk on water infrastructure by a Chinese State-owned enterprise.

"We are heartened by the government to government driven initiatives in this space and we do expect more Chinese companies to participate in the domestic infrastructure space," said John Chong, the chief executive officer of Maybank Kim Eng Group and Maybank Investment Bank in an email to Xinhua.

Malaysian investors can expect more Sukuk fund raising to take place moving forward, supported and supplemented by other banking solutions, he said.

Citing BEWG Malaysia as an example, Chong said as some Chinese companies businesses grow bigger in Malaysia, there should be increased appetite for them to diversify funding avenues into the domestic sukuk or bond market.

Analysts said the participation of Chinese companies in Malaysia's Islamic finance market is in line with Malaysian government policy to promote the country as an Islamic funds hub.

Hong Leong investment Bank Research's banking analyst Khairul Azizi Kairudin said the main reason for more Chinese companies raising Sukuk lately is global investors tend to see Malaysia as an Islamic hub, a suitable destination for Sukuk.

He saw the possibilities that more Chinese companies would raise funds in the Sukuk market going forward as there are more Chinese companies partnering with local entities to undertake projects in Malaysia, especially in the construction industry.

During the Sukuk launching, BEWG Malaysia's chief executive officer Ong Kian Min explained that the group chose to raise funds via Sukuk in Malaysia as the country has the largest Islamic capital market.

The proceeds from the Sukuk will be used to finance the refurbishment and upgrading of the water treatment plant project that has been awarded by a Malaysian state government, according to Ong.

Meanwhile, Tadau Energy is a project company undertaking a large scale solar project in Malaysia's Sabah state on North Borneo under two 21-year power purchase agreements entered into with Sabah Electricity in December 2016.

Proceeds from the bonds will be channeled to finance the project, Tadau Energy said in a statement.

Chinese property giant Country Garden's Malaysian unit Country Garden Real Estate was the first Chinese company to issue Islamic bonds in Malaysia. In 2015, the group made a debut sales of Sukuk from a 1.5 billion ringgit program.

Lee Heng Guie, the executive director Socio-Economic Research Center (SERC) shared the same view that more Chinese companies are looking into Sukuk as Malaysian government has been promoting it.

Moreover, it has also been proven that Sukuk is more stable when the market is weak.

He also opined that the participation of Chinese companies in Sukuk market will spur the market activities in Malaysia's capital market, Malaysian banks will therefore benefit along the funding chain.

Malaysia's Sukuk market accounted for 41.1 percent of total global Sukuk market of $72.9 billion in 2016, according to RAM Rating Services (RAM).

Last year, Malaysia's outstanding domestic Sukuk market stood at 661.9 billion ringgit, 9 percent higher when compared with 608.5 billion ringgit in 2015. It was also 29.03 percent higher when compared with the total outstanding domestic conventional bond market of 513 billion ringgit in the same year.

Despite weak market condition, analysts shrugged off the concern over subscription.

"From institutional investors point of views, there is always a demand for Sukuk, because most insurance companies, pension funds, or even government agencies, prefer to invest in Sukuk for their Syariah (Islamic religious law) compliance mandate," Phillip Mutual Bhd chief strategist officer, Phua Lee Kerk said.

He believes that the participation of Chinese companies in Sukuk market will offer more options for Malaysian investors. "I think current market sentiment on Sukuk is not that bad."

Khairul Azizi also said the market lacks Syariah compliance products, in which many institutional funds, such as the state pension fund Employees Provident Fund, are looking to invest in.

In terms of monthly payment, the Sukuk is less vulnerable and volatile when compared with other conventional funding, making it a viable financing tool at this moment, he added.