As one of the ASEAN countries with the best economic, trade and cultural relations with China and a strategic location, Malaysia is deeply involved in the Belt and Road Initiative and RCEP. Malaysia is a global Center of Islamic finance. Sukuk, with its rich currencies and long issuable maturity, is suitable for infrastructure project financing and fits the financing needs of "Belt and Road" projects. It is an important financing tool for Chinese institutions to explore and realize the external cycle of project construction-financing.

First, Chinese enterprises take Malaysia as an important fulcrum for the Belt and Road Initiative

1. Malaysia plays an important fulcrum role in the Belt and Road Initiative

Since the belt and Road Initiative was launched, many Belt and Road projects have landed in Malaysia. China has been the largest source of FDI in Malaysia's manufacturing sector for four consecutive years, and Malaysia is the largest signatory of China's "Belt and Road" overseas contracting project. More than 150 Chinese construction companies have set up regional headquarters in Malaysia. In terms of digital economy, Malaysia was the first country to take the initiative to support Huawei's 5G investment, and its digital economy recorded an average annual growth rate of 9 percent from 2010 to 2019.

(2) The signing of RCEP will help Malaysia become one of the core hubs of the global supply chain for Chinese and multinational enterprises

At present, ASEAN has become China's largest trading partner. Malaysia, as an important economy of ten ASEAN countries, has over 100 billion US dollars of annual import and export volume with China over the years. The value of China's contracted projects in Malaysia ranks first in the world. The signing of the Regional Comprehensive Economic Partnership (RCEP) will increase the growth rate of intra-regional trade and investment, further improve the long-term momentum of economic growth in China and Malaysia, and promote Malaysia as one of the core hubs of the global supply chain for Chinese and multinational enterprises (reaching out to ASEAN, East Asia and beyond).

Second, Malaysia's Sukuk market is mature and sukuk is suitable for financing belt and Road projects

(I) Sukuk emphasizes risk sharing and income sharing to better protect the interests of investors

According to the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), an Islamic bond (SUKUK) is "a certificate of entitlement with an equal value in the assets of the partnership. "Sukuk are issued to mobilise capital to create new projects, develop existing projects or finance a business activity through equity participation." Islamic law forbids the payment of interest, so sukuk offer profit on assets in lieu of dividends. From the perspective of financiers, sukuk can be used by any institution or enterprise as long as it complies with Islamic rules. From the perspective of investors, any enterprise can invest in Sukuk. Sukuk, which emphasizes risk sharing and income sharing, can better protect the interests of investors.

(II) Malaysia has a mature legal and tax system for Sukuk, abundant institutional investors, and a large demand for long-term Islamic financial assets

The Malaysian government has long encouraged and supported the development of Islamic finance. As a global Islamic financial center, Malaysia has a sound legal and tax system for Islamic bonds. At the end of 2019, the global stock of Sukuk was $551.44 billion, of which Malaysia had $261.3 billion, accounting for 47.4% of the global stock of sukuk. In 2019, global Sukuk issuance reached us $145.7 billion, up 18.7% from the same period last year, with Malaysia topping the list with US $63.63 billion, accounting for 43.7%.

Malaysia has mature insurance, pension and asset management industries, abundant institutional investors and a large demand for long-term assets, which is conducive to the development of Sukuk.

(c) There are various currencies of sukuk around the world, with the largest proportion denominated in Malaysian ringgit

Among all sukuk issued from 2001 to 2019, ringgit-denominated bonds amounted to us $665.45 billion, accounting for 53.4%; Dollar-denominated bond issuance was $276.2bn, or 22.1 per cent; Sukuk denominated in Saudi Riyals accounted for 7.2 per cent; Sukuk denominated in Indonesian rupiah accounted for 6.4 per cent.

(IV) The maturity of Sukuk can be up to 30 years, which is conducive to financing long-term projects such as infrastructure construction

There is strong demand for long-term assets from Islamic funds. Take Malaysia as an example. The 30-year Yield curve of Islamic bonds and corporate bonds from AAA to BBB (Malaysian RAM rating) can strongly support the financing and development of medium and long term projects such as livelihood and infrastructure.

3. Problems existing in the financing of belt and Road Projects

(I) Currently, the financing of "Belt and Road" projects relies on preferential policy loans, and the sustainability of government support is weak

"Area" project main financing channels is derived from the developmental financial institution, policy Banks, preferential loans and small commercial Banks to obtain loans, through in many infrastructure projects, the CDB or import and export bank in support of a single project or even more than 80%, and for the preferential loans under the policy support, preferential policies and unsustainable.

(ii) It is difficult for commercial banks to get involved in long-term loans due to their own reasons, and it is urgent to explore medium - and long-term financing channels for belt and Road projects

The Belt and Road projects have difficulty obtaining long-term loans from commercial banks that match the duration of the projects. Commercial banks are generally difficult to provide long-term loans to enterprises because of their short debt maturity. For the "Belt and Road" projects, the project payment period is long, facing the repayment pressure of short-term loans from commercial banks. Therefore, "Belt and Road" projects need to explore medium - and long-term financing channels other than policy bank loans.

(3) Chinese enterprises try sukuk, but Chinese investors are disconnected from Sukuk assets, and Sukuk of Chinese enterprises generally have a high premium

In 2017, Beikong Water (Malaysia) SDN BHD and Country Garden (Malaysia) SDN BHD respectively issued RM400 million and RM810 million Sukuk, marking the first time for Chinese companies to issue Sukuk in Malaysia. The financing cost of sukuk of the two Chinese enterprises is higher than that of the local enterprises with the same rating. On the one hand, there is no Sukuk issued by the Chinese government or financial institutions in Malaysia, which makes the investment banks lack a price benchmark for the sukuk pricing of Chinese enterprises. On the other hand, Chinese investors are not active in sukuk investment and are disconnected from Sukuk assets, which makes the bond issuance cost of Chinese enterprises high.

4. Practice of overseas Chinese banks actively participating in sukuk investment and issuance, foreign exchange market transactions and digital bond market construction

(I) Actively participate in Sukuk investment and support the development of local railway, water and other infrastructure-related projects

The construction bank of China (Malaysia) co., LTD., under the support of head office, in 2018, carried out the first islamic bond investment, islamic Treasury bonds investment products include Malaysia, Malaysia government guarantees of islamic bonds, and islamic bond, issued by local Chinese companies support the development of the local railway, water and other infrastructure projects. While obtaining certain economic benefits, it also obtained better social benefits.

(2) Actively explore the issuance of Sukuk to prepare for underwriting Sukuk of Chinese enterprises in the future

Financial institutions generally have high ratings and are easily accepted by investors. Therefore, it is easy for financial institutions to obtain fair coupon rate when issuing bonds, which is conducive to forming the market benchmark price for Chinese enterprises to issue bonds. CCB has raised funds through several bond issues in international markets, and its pricing is familiar to international investors. China Construction Bank (Malaysia) Limited is a wholly-owned subsidiary of CCB, and its pricing standard is relatively transparent. Currently, It has obtained the rating of AA+ financial institution from Malaysia Ratings Limited (MARC), and has met the rating requirements related to bond issuance, and is actively preparing to issue Sukuk.

(c) Actively participate in local foreign exchange and interest rate derivatives markets to provide adequate hedging options for cash flows related to bond investments and issuance

Malaysia's foreign exchange and interest rate market has a long history of development. Due to the wide range of participants, Malaysia's long-term interest rate curve has strong reference and liquidity. The ringgit interest rate swap market is very liquid in terms of quotations up to 10 years and can meet most trading and hedging needs. For some specific projects, the market can also quote rates of interest rate swap (IRS) or currency swap (CCS) for 10 to 20 years. This highly liquid financial derivatives market is an important basis for foreign investors to participate in the investment of Malaysian Sukuk. China Construction Bank (Malaysia) Limited is actively engaged in RMB/ringgit swap services in the Malaysian market to help Chinese investors and bond issuers avoid foreign exchange and interest rate risks.

(IV) Actively participate in the construction of local digital bond market

China Construction Bank (Malaysia) Limited has actively participated in the construction of the local digital bond market, including participating in the proof of concept of blockchain bonds of The Malaysian Stock Exchange, and discussing and cooperating with local licensed financial institutions on digital bond business as the lead underwriter of bond issuance. The aim is to enhance the participation and voice of Chinese institutions in the Sukuk market and facilitate the investment of Chinese institutions in sukuk.

Fifth, use Sukuk business to solve the financing pain points of "The Belt and Road" and promote the project construction-financing external cycle

(I) Promoting Sukuk business through investment and financing to address the pain points of the Belt and Road project financing

At present, the Sukuk market plays a very important role in the economies of countries along the Belt and Road. In the bond issuance attempt of Chinese enterprises mentioned above, due to the lack of financial institutions familiar with Chinese enterprises to participate in the investment, the Pricing of Islamic bonds of Chinese enterprises appears a certain premium phenomenon. CCB advocates Chinese institutions to actively try sukuk investment. On the one hand, it can expand their investment scope and provide beneficial choices for improving investment benefits. On the other hand, it can lay a solid foundation for Chinese enterprises to issue Sukuk and improve the bargaining power of Chinese issuers. Furthermore, Chinese banks should actively participate in and develop investment banking business of Sukuk, gradually accumulate experience in sukuk underwriting business, and comprehensively improve the service capacity of Chinese banks in Sukuk.

(2) Promote the construction of the Islamic bond market with RMB denominated bonds as the starting point

It is of special significance to promote the issuance of Yuan-denominated Sukuk under the background of RMB internationalization. Taking advantage of the internationalization of RMB, it can not only increase the range of investable assets of offshore RMB, but also improve the financing capacity of "Belt and Road" projects. Taking RMB Islamic bonds as the focus is conducive to attracting RMB institutional investors to invest in Sukuk. Meanwhile, issuers can carry out RMB to ringgit hedging transactions through local banks such as Overseas Chinese banks to avoid the exchange rate risk of currency mismatch between assets and liabilities.

(3) Actively innovate and cooperate with the government and regulators to expand digital bond business in Malaysia

With the wide application of block chain technology in the world, bond issuance based on block chain technology is in a booming period. Malaysian regulators hope to leverage blockchain technology and tokenization of assets to improve the efficiency, transparency and credibility of the bond market, further develop its bond business and consolidate Malaysia's leading capital market position in the ASEAN region. The construction bank of China (Malaysia) co., LTD., actively cooperate with the government and regulation, involved with the horse by block chain bonds proof of concept planning and implementation of the future will continue to overseas Chinese peers, hand in hand in close cooperation with local official exchange, actively explore involved in digital bond issue block chain, continue to promote digital infrastructure construction bank, Promote the cultivation and development of digital ecology of bond market.

Qi Feng, Ziming Wang, Lin LAN, China Construction Bank (Malaysia) Limited