China and Arab countries have a huge potential for financial cooperation as bilateral trade increased an average of 20 to 30 percent in recent years, especially in Islamic bond issuance and the establishment of investment funds, executives said on Sept 13.

"It's very promising to develop asset securitization through issuing Islamic bonds or setting up joint investment funds to finance projects such as large–scale infrastructure construction," said Lu Fang, chairwoman of the Bank of Ningxia.

Islamic bonds, known as "sukuk", are structured to comply with Islamic law and its investment principles, which prohibit the charging and paying of interest.

The bonds are not based on debt, but instead establish partial ownership, and investors can get a part of the profits generated by the asset.

Russia has announced its first sukuk in June to attract the Arab capital for a business center in Tatarstan, which will cost an estimated $200 million.

But capital controls need further loosening in hubs like Ningxia if China wishes to promote financial ties with the Arab world, she added.

Since 2009, the bank has been developing an Islamic banking business that is consistent with the principles of sharia law, which prohibit accepting specific interest for loans of money. It has financed 700 million yuan ($111 million) for local Muslim exporters.

And the two sides should explore yuan settlement in bilateral trade, set up energy investment funds and regional oil futures exchange to provide efficient financial support for energy cooperation between each other, Lu said.

She made the remarks while attending the China-Arab States Workshop on Finance Cooperation in Yinchuan, capital of the Ningxia Hui autonomous region.

Home to more than 2.2 million Muslims of the Hui ethnic group, Ningxia has been regarded as a hub for economic cooperation between China and Arab states.

The central government has approved establishing "an inland opening-up trial zone" and has a "comprehensive tax-free zone" in Yinchuan to facilitate international trade.

Reem Badran, vice-chairman of the Amman Chamber of Commerce, said issuing Islamic bond could be a very promising direction for both China and Arab countries to promote financial cooperation.

The bonds have been widely used in Muslim countries, and also accounted for 30 percent of financing in some other regions. In the next three years, issuance of such bonds could reach $2 billion. Chinese enterprises could benefit a lot by collecting money through such bonds," she said.

"And we hope to work with China to set up some investment funds and venture capital, to finance some specific sectors and small businesses. This would be a win-win choice for both sides."

Qi Tongsheng, deputy head of Ningxia government, agreed.

"The financial cooperation between China and Arab states is still at the beginning phase, compared with the rapid growth in bilateral trade and investment," Qi said.

Trade between China and Arab states, which spans nations in the Middle East and North Africa, reached $200 billion in 2011, up 35 percent from a year earlier. Mutual investment increased eightfold during the last decade.

China and the Arab states have set a trade target of $300 billion by 2014. As the Arab world undergoes transformation, the potential for bilateral cooperation is huge, Vice-Premier Li Keqiang said on Sept 12.

He said cooperation between the two sides should be strengthened to fend off the global financial crisis.