Since the Belt and Road Initiative’s launch nearly a decade ago, has it been a boon for the Islamic economy? Analysts say it is a mixed bag.
When the Belt and Road Initiative (BRI) was launched in 2013 to much fanfare, the world was quite a different place. The COVID-19 pandemic was seemingly unimaginable, certainly the global impact it would have, there was no war between Ukraine and Russia causing widespread reverberations, Afghanistan was not under the control of the Taliban, the Uighers were not high on the Western agenda, and globalization was in full swing.
There was genuine optimism that the One Belt One Road initiative, as it was originally called, would be a harbinger of greater cooperation and trade, particularly in Central and Western Asia, but also further afield.
The initiative was given further wings with the inking of the Joint Comprehensive Plan of Action (JCPOA), known commonly as the Iran nuclear deal, in 2015. Iran was brought in from the cold, technically able to trade with the world, while the country would be able to play a role as a transit hub as in the days of the ancient Silk Road.
In the early years of the BRI, Beijing announced a sprawl of infrastructure and transportation projects, with state-owned banks providing the financing to get the project rolling on land and at sea.
Iran was one of the early beneficiaries. “There is an argument that the BRI really started in Iran under a different name some 25 years ago. The first investments in railroads and infrastructure was there and [Chinese president] Xi Jinping captured naming rights by bringing back the Silk Road. Chinese policy was to help Iran, and make huge amounts of money at the same time, as Iran had so few friends,” said Dr. W. Travis Selmier II, a visiting scholar at Indiana University Bloomington, USA.
$4 trillion investment
Fast-forward to 2020, and the Iran deal had been undermined by the USA (in 2018), the COVID-19 pandemic was in full swing and China was in lockdown. But by that year, BRI projects were estimated to be worth over $4 trillion as Beijing expanded the initiative to 147 countries. Of that amount, 1,590 projects, worth $1.9 trillion, were BRI related, while 1,574 other projects worth $2.1 trillion were “Projects with Chinese involvement”, according to Refinitiv and Silk Road Briefing.
The majority of projects have been land focused, improving road and rail connectivity between Western China, Central Asia and Western Asia to Europe. Cargo trains now run from Spain to China’s Western province of Xinjiang, where economic zones have been developed to tap into BRI trade.
It is Central Asia, Iran and Pakistan that are considered to be the main beneficiaries of the BRI.
“Kazakhstan and Iran are very high on the list as beneficiaries of BRI,” said Selmier. “From Xinjiang to Tehran and beyond, BRI has made a difference, as they’ve electrified and made high-speed the Iranian railway part from the Turkmenistan border.”
China is the biggest foreign investor in two Islamic republics, Iran and Pakistan, with ties between Beijing and Islamabad having been strong for decades.
“The China-Pakistan Economic Corridor (CPEC) is the key link between the East and West, and by extension Western Asia, as it is connecting all of these different routes with the sea,” said Mobasher Zein Kazmi, Head of Research at The Digital Banker in Australia. Pakistan’s deep sea port at Gwadar, being developed with China, “is the crown jewel of the CPEC project,” he added.
At the same time as East-West trade and logistics is improving, so are North-South corridors as Russia strengthens its historic ties with Central and Western Asia, as well as with China as it pivots away from Europe and the USA.
“The BRI going East-West and the North-South corridors (with Russia) fit together with a network or grid of transport services. The (new) train lines are proving all this effort is taking off. Russia and China do compete in Central Asia, but they will cooperate a lot more, there is no doubt,” said Theodore Karasik, a senior adviser at consultancy Gulf State Analytics in Washington, DC.
China spreads its wings through the BRI (Shutterstock).
The Gulf
The Gulf Cooperation Council (GCC) countries increased economic focus over the past decade on the Far East for investment and to shore up hydrocarbon purchases has benefited the BRI.
“It is pulling the Gulf states towards the East, and we saw that in the meeting with (Saudi Arabia’s Crown Prince) Mohammed bin Salman and Xi in Beijing (in 2019), which was highly significant,” said Karasik.
Last year, bin Salman urged Xi to merge the BRI with the kindgom’s Vision 2030.
Karasik describes the growing ties as a triangle between the Gulf states, Russia and China. “Asia is pulling all the goods and services towards it and there is more unanimity between Russia, China and the Gulf states than there is between the Gulf states and the US and Europe,” he said.
BRI versus TTP
In the broader picture amid growing US and China economic rivalry, the BRI is outpacing the Washington-backed Trans-Pacific Partnership (TPP), a trade agreement inked in 2015 by 12 Pacific Rim economies and the USA.
Consensus forecasts project that the BRI may increase global GDP by $7 trillion or 5% annually for the next 10-15 years while international trade and foreign direct investment in BRI countries is projected to rise by 10% and 8% respectively. “We believe this should contribute to real income growth of just over 3% in BRI participating economies, marginally higher in comparison with TPP members that will register enhanced growth of 1%. More importantly, a 3% rise in the standard of living of the roughly 144 BRI economies is also expected as a direct consequence of this cross-regional partnership programme.”
“Currently China's competitors are forming their BRI (the TTP) to counterbalance the Chinese BRI by leading or misleading the world that China is setting a debt trap for BRI countries. The developing countries should thank President Xi Jinping as countries other than China are competing to help while President Xi 's initiative is to get the world to help,” said Joseph Chan at Silk Road Research in Hong Kong.
Islamic finance’s role
With the BRI’s core and periphery involving many Muslim-majority countries, it would appear a natural fit for Islamic finance to play a role, particularly in infrastructure projects. When Hong Kong issued a dollar-denominated sukuk in 2014, it looked as if Islamic finance was to indeed play a role in the BRI.
But while there have been further sukuk issuances, and collaborations such as between Malaysian and Qatari financial institutions in China, such developments have been “few and far between,” said Kazmi.
“There has been the tweaking of regulations to attract investments, whether from Middle Eastern investors or in South Asia, but if you look at hard Islamic finance investments (in the BRI) they are missing, whether in Central Asia, the GCC or the rest of the Middle East and North Africa,” said Kazmi.
The under utilisation of Islamic finance is due to multiple factors. One is that the Islamic finance sector, while worth $3.6 trillion, according to the State of the Global Islamic Economy 2022 report, is not as used for international financing as conventional financing, with sukuk issuances typically sovereign-related. The Islamic finance hubs have also not jumped onboard with BRI financing, in Malaysia as well as in the GCC.
“There is an argument that sovereign wealth funds have come to dominate the Gulf economies and large companies, so it doesn’t produce the environment for Islamic finance as a useful large scale investment vehicle. But that doesn’t mean it won’t come into play later,” said Karasik.
There has also been the expectation that Central Asian countries would have embraced Islamic finance, but has remained marginal in the banking sector despite Muslim-majority populations. Astana, the capital of Kazakhstan, for instance has not emerged as the Islamic finance hub some expected. Countries like Pakistan, which has a burgeoning Islamic finance sector, have also been hit by economic instability – and the recent floods which ravaged the republic – that has prompted Islamabad to look more for external funding for projects than domestically as it grapples with rising debt levels.
Overall, the time for Islamic finance and the BRI has not yet come. “It is a long game, to have the supporting regulatory frameworks and education, and to have markets prepared to accept Islamic finance,” said Kazmi. “The demand for Islamic finance is possibly lukewarm, or governments don’t see the difference or value that it provides. There is a fair bit of work to do for Islamic finance to gain traction.”
Tepid uptake in China
An overriding factor in the lack of Sharia-compliant financing in the BRI is that China itself has not embraced Islamic financing. This is partly due to the country’s state-run banks, among the largest in the world, dominating the sector, and currently grappling with the economic ramifications of the pandemic.
“The BRI is slowing considerably because Chinese debt has gone way up, and the capacity is not there,” said Selmier.
A further factor is that China’s relationship with Islam has become increasingly fraught over the past several years. Although the country has an estimated 26 million Muslims, Beijing’s tolerance has been tested by attacks attributed to Uigher separatists from Xinjiang, while the West has accused Beijing of human rights abuses against Uighers.
“It is highly unlikely that the BRI will use Islamic banking and financial products, not just because of (the situation in) Xinjiang. There is strong interest in Islamic finance in China, but officially, a banker might shorten his career if they say Islamic finance is a really fast growing market, and a natural fit with infrastructure. There are probably Chinese bankers that have said this would be a smart way to go, to raise local funds and increase Chinese soft power and reputation as a global leader, but it might not be the time to do it. It is too dangerous, and linked to Xinjiang,” said Selmier.
Green sukuk
There is optimism that Islamic finance could make headway in BRI investments through the growing adoption of green financing, specifically green sukuk, which have been issued by Indonesia and Malaysia, among others.
“China has pledged to be (carbon) net zero by 2050. If they are taking this seriously, it is aligned with the social principles embedded within Islamic finance, to ensure a project is sustainable and reducing its carbon footprint,” said Kazmi. “Green sukuk is where real opportunities lie for Islamic economy participants. At a policy level, the Chinese leadership has said that green financing and sustainable investment will be important going forward, so that would be a good entry point for a lot of Islamic banks.”
Halal products
As for whether trade in halal products has been bolstered by the BRI it is not clear due to the lack of specific data about the overall Islamic economy. However, the general uptick in trade due to the BRI implies there has been an upswing, particularly as China is the largest exporter to Organisation of Islamic Council (OIC) countries, according to the SGIE report.
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