C. The regulation of Islamic Finance in China
Current Chinese political and economic structure is featured with ‘one country two system’, different jurisdictions are operated in mainland China and Hong Kong respectively, and the two jurisdictions have different economic and political systems. For this reason, the regulation frameworks in the two jurisdictions are also different from each other. Therefore, the analysis bellow would be conducted with two separate parts regarding to the different regulatory framework on Islamic Finance in mainland China and Hong Kong.
Section One: the regulation of Islamic Finance in mainland China
The development of Islamic finance in mainland China is in incongruity with the size of its Muslin population. In mainland China there are large amount of Muslim communities, which have more than 23 million people, constituting roughly 1.8% of total population in the latest national population census in 2010[1]. The large amount of Muslim population nursed a prominent demand for the Sharia-compliant financial products and services. It was also estimated that Northwest China, mainly Xinjiang Uygur Autonomous Region (新疆维吾尔自治区)and Ningxia Hui Autonomous Region（宁夏回族自治区）, with the most concentrated Muslim population in China, would become another emerging Islamic Finance center[2]. However, compared with Islamic countries or even United Kingdom and Singapore, the development of Islamic Finance in China is a bit lagging and the size of Islamic Finance is also small. Besides some initiatives of several financial institutions, the Islamic Banking system is not yet established in mainland China till now[3], and combined with complex political and social background in recent years, the development of Islamic Finance regulation in mainland China is also featured with undeceive volatility.
Under current legal and regulation system of mainland China, there is no specific regulation and law regarding the Islamic Finance. Instead, the current legal framework in mainland China is inconsistent with the basic requirement of Islamic Finance. Under current Law of the People’s Republic of China on Commercial Banks (《中华人民共和国商业银行法》), the commercial bank in China is obligated to pay interest to depositor[4] and has right to collect interest from borrower[5]. Under current legal framework of mainland China, because the interest is a necessary element of the operation the financial system, there is no space for separate legal framework for the regulation of the interest-averse Islamic Finance, which is even not officially acknowledged as a legal financial activity in mainland China.
Nevertheless, a binary regulation model used to be implemented on an experimental basis for a short period in Ningxia. It’s inevitable that Islamic Finance still operated to satisfy the demand for Sharia-compliant financial services in some Muslim communities. Some financial institutions designated to provide financial service to Muslim people had emerged after the reform and open up (改革开放) of China in 1978, including the Hezhou Islamic Financing Company in 1987 and the Muslim branch of Lanzhou Bank in 1997[6]. More recently, in 2009, promoted by China Banking Regulatory Commission (now has become China Banking and Insurance Regulatory Commission), the first Islamic Finance institution began to operate in Ningxia Bank in Ningxia. To satisfy the basic requirement of Islamic Finance, in the financial service provided by these financial institutions mentioned above, the ‘interest rate’ would be normally replaced by an alternative ‘rewards rate’[7]. Another aggressive actions in the Ningxia Bank is the setting up of the Islamic Finance Consulting Committee(伊斯兰金融咨询委员会) and the Islamic Finance Service Sector(伊斯兰金融事业部), which are responsible for the operation and management of Islamic Finance products and monitoring whether the Islamic Finance product satisfying the Sharia law[8]. It can be inferred that the proposed regulation framework, feature with an Islamic Finance Consulting Committee, on the Islamic Finance in Ningxia Bank is similar to the binary model adopted in United Kingdom, as explained above. Similarly, it also needs relevant preferential tax policies to offset the possible double taxation issue due to its tangible asset based nature[9].
However, the aggressive experimental Islamic Banking service in Ningxia Bank ceased to operate after three years’ operation and the application of establishing Islamic financial center and opening-up financial policy by Ningxia was also disapproved by the State Council in 2012[10]. This showed the prudence of central government when considering officially acknowledging the Sharia law’s status in regulating Islamic Finance. Up until now, there is no longer official move to launch officially acknowledged Islamic Finance system and relevant regulation initiatives.
Section Two: the regulation of Islamic Finance in Hong Kong
Unlike mainland China, the Islamic Finance experienced a decent development in Hong Kong and it is also acknowledged with official status. Similar to Singapore, Hong Kong government is also keen to transform itself into a hub for the Islamic Finance in Asia with many efforts, including the approval of the Hang Seng Islamic China Index by Hong Kong Securities and Futures Commission in November 2007, the Memorandum of Understanding between the Hong Kong Securities and Futures Commission and the Dubai Financial Services Authority and a review of current Hong Kong tax system and the judicial system to provide necessary perquisites for the development of Islamic Finance in Hong Kong[11]. In 2008, the Malaysia Hong Leong Bank Hong Kong Branch was approved by Hong Kong Monetary Authority to provide Islamic Banking service in Hong Kong[12]. And some Hong Kong local banks, like HSBC, also provides Islamic financial product[13].
To regulate the Islamic Finance in its financial market, Hong Kong adopted the less aggressive unified regulation model. As pointed by Ho Wai-Yip, one difference and advantage of Hong Kong from mainland China is that Hong Kong’s tax system is free of capital gains tax and Hong Kong government can exercise discretion to grant tax exemption when necessary[14]. This is helpful to cross one of the two hurdles to the regulation of Islamic Finance mentioned before: the tax issue, as it can help avoid the double taxation problem when dealing with some Islamic Finance product.
Hong Kong also adjusts existing law to consolidate Islamic Finance into its legal system. Like mainland China, Hong Kong also faces difficulty in forming a holistic regulation legal framework on Islamic Finance. Like that in mainland China, its existing legal framework is also not compatible with the requirement of Islamic Finance and the amendments of relevant law are needed[15]. However, unlike mainland China, which is declined to adopt an official regulation framework on Islamic Finance and even acknowledge the official status of Islamic Finance, Hong Kong is more willing to provide an official regulation framework to support the development of booming Islamic Finance in Hong Kong. Currently, the main legislation effort regarding to consolidate Islamic Finance into the legal system in Hong Kong is to make amendments on tax law to solve the possible double taxation and interest problem on Islamic financial products (mainly Sukuk bond). Under this background, the Inland Revenue Ordinance (Cap. 112) and the Stamp Duty Ordinance (Cap. 117) were both amended in 2013 and 2014 to ‘provide a tax structure for sukuk which is comparable with that for conventional bonds, and to allow for the issuance of sukuk under the Government Bond Programme’[16]. The purpose of these amendments is mainly to offer stamp relief to the Islamic financial products[17]. Regarding to the interest issue, these amendments deemed the Sukuk as a special form of debt arrangements which may not be a loan and therefore the ‘interest’ in the Interest Article of Double Taxation Agreements in Hong Kong is not applicable[18]. With this special arrangement, Hong Kong can provide the satisfying legal framework for the operation of Islamic Finance in Hong Kong while obliging the common law principle that when dealing with Islamic financial product, the common law shall be the sole governing law but the governing law clause may be subject to Sharia principles, which is set up in Shamil Bank of Bahrain EC v Beximco Pharmaceuticals Ltd and Others[19].
The positive legislation movement, combined with other factors, promoted Hong Kong to be one of the major Sukuk issuance jurisdictions in 2017, with 1.3% of the total volume of sovereign issuances of Sukuk globally, ranking first in non-Muslim jurisdictions[20]. The regulation framework in Hong Kong is similar to that in Singapore, that instead of setting up a separate regulating rules and an independent Sharia Consulting Committee, Hong Kong tries to nurse a mature Islamic financial market in Hong Kong while maintaining current regulation framework unchanged except some minor amendments.
Section Three: the problem of the regulation on Islamic Finance in China
The regulation on Islamic Finance in mainland China and Hong Kong represents two typical regulation models popular in the world, with mainland China adopting an experimental separate binary regulation model and Hong Kong adopting a unified regulation model. The failure of the experimental binary model in mainland China and the success of Hong Kong’s unified model maybe able to provide some sights of the inherent problem of the regulation issue on Islamic Finance in mainland China.
From the review above, it’s clear that the development of Islamic Finance and its regulation in mainland China meets more challenge than that in Hong Kong. Compared with a massive amount of Muslim people in mainland China, the officially recognized Islamic Financial activity and relevant regulation is disproportionate. And it is still not clear whether in the future the Islamic Finance would be officially recognized with relevant regulation framework.
The complex social and political environment in Muslim communities in China can provide some explanation why PRC government is more hesitated than Hong Kong government to launch an official regulation framework on Islamic Finance. The experimental Islamic division in Ningxia Bank was launched in 2009, but in the same year, the infamous July 2009 Ürümqi riots (七五事件) broke out in Xinjiang. Both of the two incidents represented the loss of control of the Muslim community in northwest China under the Hu Jintao and Wen Jiabao government. After July 2009 Ürümqi riots, PRC government, especially which under the leadership of Xi Jinping since 2012, began to take a more forceful regulating attitude toward the expanding Hala (清真) infiltration in China, especially in Northwest region. Under this background, it’s not surprising that state council disapproved the aggressive binary regulation model regarding the Islamic division of Ningxia Bank, which was further stopped in 2012, and since then the there have been few official reports regarding the development of Islamic Finance in mainland China. Even if there are still private practices of Islamic Finance, they would be under underground status without official acknowledgement and regulation, which means that no applicable official law recognizes Islamic Financial activities in mainland China. In other words, the Islamic Finance in mainland China is in a de-regulation status.
Besides the political and social considerations, the risk of the official acknowledgement of legal pluralism is another possible explanation to the lagging of the regulation on Islamic Finance in mainland China. Initially invented by anthropologists, legal pluralism is used by legal scholars to describe ‘the presence in a social field of more than one legal order’.[21] By contrast with ‘legal centralism’, legal pluralism can be found in many countries, especially which are dominated by Muslim population. For example, in Malaysia, the legal system is featured with a two-level structure with the Sharia law governing Muslim people and common law governing other ethnic groups.
Even though China is not a Muslim country, in several recent decades, Sharia law has been operated as de factor law in certain Muslim communities in China, for example Yunan Shadian(沙甸), where Muslim people constituted around 91% of the total population[22]. In fact, it can be found that conventional law has been substituted by Sharia law in Shadian extensively in recent years. It was reported that the sale and consumption of alcohol has been banned in Shadian because drinking alcohol was prohibited by the principle of Sharia law[23]. Even though Shadian is only a small town, the coexistence of both secular law and Sharia law indicates the incompetence and ignorance of local government when enforcing secular law in Muslim dominated communities. However, in recent years, with the soar of terrorist attacks conducted by Muslim people in China, like the 2014 Kunming attack (2014年昆明火车站暴力恐怖袭击事件), Xi Jinping government’s attitude towards Sharia law transfers from the laissez-faire acquiesce in Hu Jintao period to a more counteracting suppress attitude. With the change of official attitude and the enactment of the Counterterrorism Law of the People’s Republic of China (《中华人民共和国反恐怖主义法》) in 2018, the risk of the expansion of Sharia law in China maybe offset to some extent but it also means that in the near future it’s hard to see a official regulation framework on Islamic Finance.
Under this background of official hostility to the legal pluralism and the spread of Sharia law in China, it is alleged that because of its special religious oriented requirements, Islamic Finance cannot be governed under the regulation system of People’s Bank of China and it was said that this is one reason why the experimental Islamic finance in Ningxia Bank was disapproved by State Council in 2012[24]. If the experimental binary regulation scheme in the Islamic division of Ningxia Bank was approved by State Council, it would mean that the legal pluralism would have gained official acknowledgment by PRC government, as under this regulation scheme, a separate regulating principle is the Sharia law. It would be strongly in conflict with the unified Chinese legal system and current political theme to combat with ‘three evil forces’ (三股势力)[25]from Muslim communities.
However, one possible risk of current de-regulation status of the Islamic Finance is that non-acknowledgment does not mean non-existence. The Islamic financial activities will continue to exist as long as the Muslim people continue to live within China, and this will leads to possible thrive of the underground Islamic financial activities outside the eye of the official authorities. In the long run, it may become one possible source of financial irregularity in Muslim community. By contrast, the unified model adopted by Hong Kong is a more promising and effective regulation framework to make Islamic Finance activities under the eye of governmental authorities.
[1] CIA, ‘the World Factbook:China’<https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html> accessed 18 March 2019.
[2] Xinyi Lu, ‘A Study of the Banking Services for Muslims in China’, (2014) 5 Journal of Business and Economics 2227,2230.
[3] ibid 2232.
[4] Article 29 & 33 of the Law of the People’s Republic of China on Commercial Banks.
[5] Article 42 of the Law of the People’s Republic of China on Commercial Banks.
[6] Xinyi Lu, ‘A Study of the Banking Services for Muslims in China’, (1914) 5 Journal of Business and Economics 2227, 2231-32.
[7] ibid 2231.
[8] Zhang Yongli & Wang Bo, ‘A Prospect Analysis of Developing Islamic Finance in Northwest China Based on the OBAOR’, (2016) 18 Journal of Shanghai University of Finance and Economics 36, 43-43.
[9] Cheng Zhiyun, ‘Ningxia Bank first impalement the experimental Islamic Finance’ (the Economic Observer, 20 June 2009) <http://www.eeo.com.cn/2009/0620/140990.shtml>accessed 13 April 2019.
[10] Jiang Yingmei, ‘Globalization of Islamic Finance and its Development Trends in China’, (2014) 2 West Asia and Africa 45, 57.
[11] Ho Wai-Yip, ‘Forging China-Gulf Strategic Partnership in the East Asian Context: HongKong as China’s Gateway of Islamic Finance?’ in Tim Niblock and Yang Guang(eds), Security Dynamics of East Asia in the Gulf Region (Gerlach Press 2014).
[12] Apply Daily, ‘Hong Leong Bank was approved to set separate Islamic Finance counter’ <https://hk.finance.appledaily.com/finance/daily/article/20080818/11489305>accessed 21 March 2019.
[13] Ho Wai-Yip, ‘Forging China-Gulf Strategic Partnership in the East Asian Context: HongKong as China’s Gateway of Islamic Finance?’ in Tim Niblock and Yang Guang(eds), Security Dynamics of East Asia in the Gulf Region (Gerlach Press 2014).
[14] ibid.
[15] ibid.
[16] Hong Kong Government, ‘LCQ19: Development of an Islamic financial market in Hong Kong’ <https://www.info.gov.hk/gia/general/201802/28/P2018022700769p.htm >accessed 21 March 2019.
[17] Inland Revenue Department Hong Kong, ‘Departmental Interpretation and Practice Notes On. 50 Taxation of Specified Alternative Bond Schemes’ 1< https://www.ird.gov.hk/eng/pdf/e_dipn50.pdf >accessed 23 March 2019.
[18] ibid.
[19] [2004] 4 AllER 1072.
[20] IFSB, ‘Islamic Financial Services Industry Stability Report 2018’ 27
<https://www.ifsb.org/download.php?id=4811&lang=English&pg=/index.php>accessed 13 April 2019.
[21] John Griffiths, ‘What is legal pluralsim’ (1986) 24 Legal Pluralism and Unofficial Law Review 1.
[22] Xinhuanet, ‘the introduction of Shadian’ <http://www.yn.xinhuanet.com/nets/gj/zj/xzzb-jj08.htm>accessed 13 April 2019.
[23] RuslanYusupov, ‘The ban of Alcohol in Shadian’ <http://www.cuhk.edu.hk/rih/csic/jiangzuo07.html>(Hong Kong, 8 December 2016 ) accessed 22 December 2018.
[24] Li Boya & Liu Xiacun, ‘Ningxia is not satisfied with experiment and wishes to build a Islamic Finance center’
<http://business.sohu.com/20121125/n358584259.shtml>accessed 23 March 2019.
[25] Chinese government defines ‘three evil forces’ as ‘terrorism, separatism and religious extremism’.