Study On The Risk Diversification Of Islamic Finance In China's Foreign Investment

Declaring the“One Belt One Road”project,China announced its plan to go global.Simultaneously,the launch and implementation of the Belt and Road initiative marks a new stage in China's opening-up to the outside world.The strategy is designed to engage over 60 countries in six economic corridors.Unveiled in 2013,the Belt and Road project is aimed at building a modern-day “Silk Road”,connecting China by land and sea to Southeast Asia,Pakistan and Central Asia,and beyond to the Middle East,Europe and Africa.It is accounting for roughly 63.0% of the world's population and a collective GDP equivalent to 33.0% of the world's wealth.Within few years China established various agreements and cooperation with countries along the new Silk Road.The major breakthroughs were made in areas of trade,investments and infrastructure.Since OBOR's 2013 launch,there have been witnessed the successful launch of the Asian Infrastructure Investment Bank(AIIB),the $100 billion BRICS New Development Bank and the $40 billion Silk Road Infrastructure Fund(SRF).The Belt and Road Initiative is expected to cost more than $1trillion and according to the American Enterprise Institute China has invested more than $210 billion up to date.Despite providing opportunities,large-scale investment projects face numerous risks and challenges.One of the risks this paper is concerned is a credit risk,which is high in a number of OBOR countries,thus instruments that will help to diversify those risks should come about.In order to solve the above problem,this paper focused on the Dow Jones conventional stock index and the Islamic stock index of the countries with emerging and developed economies along the Belt and Road and the China A-share conventional index as the representative of Chinese investor,then it applied the Dynamic Multivariate GARCH approach in order to investigate whether Islamic stock indices provide special avenue for the China-based investor.As a solution for the potential investor this research suggests to include Islamic equity indices into investment portfolio in order to provide risk diversification for the Chinese investors investing abroad.Finally,based on the results of the research,relevant policy recommendations were proposed for the development of Islamic finance in China in terms of government support,risk regulation,personnel training,operation and management,product innovation,and coordination with conventional finance.