Could The UAE Replace Hong Kong As Asia’s Financial Center?
US sanctions imposed on China and Hong Kong—one of the world’s biggest financial centres—due to China’s new national security law for Hong Kong, could end up benefitting the UAE, as companies look to move out of the city to safer destinations.
The UAE, with good diplomatic relations with both the east and west, could become the next gateway to China.
KEY FACTS
For years, Hong Kong has benefitted from the "one country, two systems" arrangement. The city was a gateway to the world’s second-largest economy, a part of China, but separate. It ranked third globally on the World Bank’s ease of doing business ranking in 2020, although that number is likely to drop next year. A large number of financial transactions to the mainland have been routed through Hong Kong.
Its autonomy and progressive legal framework made Hong Kong attractive, but the new legislation gives Beijing extensive powers to reshape life in the territory far beyond the legal system. To add to this there has been civil unrest in Hong Kong recently, with thousands of protesters out on the streets.
Since China has imposed the new law, the US has imposed sanctions on China and Hong Kong. The US measure, which penalizes banks that do business with Chinese officials, was passed unanimously by both the House and the Senate.
Hong Kong currently has the highest concentration of banking institutions in the world. It plays host to more than 78 international banks out of the largest 100 and also has a very strong presence of fund management companies. Many large financial institutions may now look to move their offices.
However, Hong Kong’s loss could be the UAE’s gain. The UAE is already a global hub for trade as a central point between Europe and the rest of Asia.
The UAE does not currently charge income tax, and it consistently ranks as one of the safest countries in the world. It is already the regional headquarters for most of the Forbes Global 2000 Companies, including both the top US and Chinese banks that have offices in the region.
Over 90% of the top regional CEOs of global companies are based out of the UAE. The UAE also has a good diplomatic relationship with China, the US, and Europe. The country is home to over 4,000 Chinese companies.
The UAE was ranked sixteenth on the World Bank’s ease of doing business ranking this year It is ranked first globally in the ease of getting an electricity connection, third when it comes to getting construction permits, ninth when it comes to enforcing contracts and is the tenth easiest country in the world to register property.
When it comes to financial regulation the country has made huge strides. It has two financial centres: the Dubai International Financial Center (DIFC) and Abu Dhabi Global Markets (ADGM). Both these centres have their own rules and regulations.
DIFC is home to an internationally-recognized, independent regulator and a proven judicial system, with an English common law framework. The financial centre is also home to the region’s largest financial ecosystem of more than 25,600 professionals working across over 2,400 active registered companies.
DIFC is focused on relaxed licensing and offers one of the region’s most comprehensive FinTech and venture capital environments, including easy and cheap licensing, fit-for-purpose regulation, innovative accelerator programs, and funding for growth-stage startups. It also has a regulatory sandbox, which gives startups the chance to test their products with relaxed regulations.
ADGM has three independent authorities: the Registration Authority, the Financial Services Regulatory Authority, and ADGM Courts. The center has $26 billion in assets under management. It is uniquely positioned as a gateway into China just like Hong Kong was. This is due to the partnership agreements it has signed with state-owned Chinese entities and the opening of its first international representative office in Beijing.
The National Development and Reform Commission China and ADGM are already in talks to explore and establish a Belt-and-Road investment and financing centre to support joint projects.
TANGENT
DIFC has implemented a new Data Protection Law No. 5 of 2020 from July 1, 2020. Under this new law, all companies registered with the DIFC need to ensure that the data that they receive from clients is processed lawfully, fairly and in a transparent manner. Businesses to which the law applies will have a grace period of three months, until 1 October 2020, to prepare to comply with it, after which it becomes enforceable.