Hong Kong: The bill regarding the issuance of Sukuk in Hong Kong is likely to be completed by earlier months of next year but before its completion, it has at least attracted little interest among issuers.
In March, the government asked for industry feedback on the subject and this month, it said it aimed to introduce a bill in early 2013.
A draft bill can take three months to prepare and then be passed quickly into law provided there is no controversy, said Marcellus Wong, co-chairman of the taxation policy committee at the Taxation Institute of Hong Kong, an association of tax professionals.
But the appetite from local firms to tap the sukuk market does not appear to be as strong as it was when the idea of issuing sukuk in Hong Kong was first considered seriously.
Wong stated, “It is good to have the framework in place but market interest has gone. The consultation was expected a few years back; the market is not that buoyant now. It is already a few years late.”
Previously, arrangers hoped that the main issuers of sukuk in Hong Kong would be mainland Chinese companies seeking to tap large pools of Islamic funds from Southeast Asia and the Gulf.
Hong Kong’s market for Yuan bonds has been growing rapidly; last year it saw over 100 billion Yuan ($16 billion) of issuance from 81 issuers, three times the volume of 2010, according to the Hong Kong Monetary Authority.
But recent trends within the market have not been favorable for Yuan sukuk, analysts said. For one thing, the Yuan stopped appreciating against the US dollar in the first eight months of this year and although appreciation has resumed in the last few weeks, the market now sees greater risk of two-way movements in the Chinese currency.
This has reduced the potential appeal of Yuan-denominated sukuk to investors, making any deals more expensive for issuers, the analysts said.
“Issuing sukuk is not a priority for Chinese corporates at this moment,” said Ivan Chung, Vice President and Senior Credit Officer at Moody’s Investors Service in Hong Kong.
He said, “Last year, it was almost purely a currency play with lots of short-tenor, small-amount and low-yield bonds. While the change in market dynamics has prompted currency-play investors to leave the market, issuers will be more inclined to launch longer-tenor bond with larger amounts, and thus more eager to attract a larger scope of investors.”
“Sukuk is more appealing to a niche investor base, which they (issuers) will likely consider after establishing the larger international institutional investor base,” he added.
For potential Hong Kong issuers of sukuk, the territory’s real estate sector would probably be the main source of assets to back the Islamic bonds.
But returns on such assets have declined, making sukuk based on them less attractive. In September, monthly investment yields in Hong Kong’s real estate market reached their lowest levels since data began in 1999, according to data from the government’s Rating and Valuation Department.