Can Dubai become the Hong Kong of the Middle East?

1 February 2006

HONG KONG has flourished as the gateway to South East Asia and Mainland China. With one of the world’s freest economies, a low tax structure, and a highly effective and transparent legal system, Hong Kong has become a remarkably good place in which to do business. The similarities and synergies between the two City States are frequently mooted and Hong Kong’s success is something Dubai is trying to emulate.

“There is considerable synergy between Dubai and Hong Kong,” said the chairman of Professional Property Services (PPS), Nicholas Brooke, summing up the view held by many about the similar roles and aspirations of the two City States. Chairman of Hong Kong General Chamber of Commerce and former chairman of HSBC, David Eldon, agreed. “Dubai is doing similar things,” he said. “Dubai looks towards the Hong Kong model, and sees Hong Kong as a place to become.” He also believes Hong Kong can learn lessons from Dubai, particularly its unique ability to build and foster a supply-driven rather than a demand-driven economy.

But how similar are the two cities and can Dubai ever achieve Hong Kong’s success? The most obvious similarity is that they are both City States and regional hubs — Hong Kong for China and South East Asia and Dubai for the Middle East, Africa and the Indian sub-continent. Both are seaports, with world class container terminals, and both have superior international airlines and airport facilities. Another similarity is the low tax status of both economies. Dubai, in particular, is putting considerable effort into creating free zones, of which there are now thirteen.

Hong Kong and the UAE are also high growth economies: Hong Kong’s growth from January to September 2005 was 7.3 per cent; the UAE’s estimated growth for 2005 is 12.7 per cent. Trade, re-exports in particular, is also an important driver of both economies.

Trade between the two countries is strong as well. The UAE is Hong Kong’s 19th largest export market and the largest in the Middle East. In the first seven months of 2005, Hong Kong’s exports to the UAE were two per cent up year-on-year; its re-exports to the UAE increased by one per cent and domestic exports by 22 per cent. Conversely, Hong Kong is the UAE’s 21st largest source of imports.

For both cities too the services sectors are key engines of growth, tourism in particular. Hong Kong is the world’s most services-oriented economy, accounting for 90 per cent of its GDP and the aim of the Dubai government is to encourage diversification away from oil and its downstream industries. Developing the emirate’s trading, tourism, media and shipping industries, as well as becoming a hub for financial and commercial services, is part of the master plan.

Already, tourism is a key driver of Dubai’s economy. From 1999 to 2004 the number of Dubai’s hotel guests doubled to 5.4 million, representing perhaps the highest per capita tourism ratio for a city of just over a million inhabitants. Travel and tourism in the UAE is expected to generate Dh76.2 billion ($20.74 billion) in total revenue in 2005, growing to Dh123.6 billion ($33.65 billion) by 2015, according to the World Travel and Tourism Council (WTTC). In real terms this translates to a growth rate of 2.4 per cent in 2005 and 2.9 per cent between 2006 and 2015.

Consequently, the infrastructure of both economies, especially airports and hotels, is designed to meet an anticipated high inflow of visitors. Helping to drive the tourism sector in both cities is the international convention and exhibition business. Over 300 are held in Hong Kong each year, and a similar number in Dubai.

Dubai, like Hong Kong, also aspires to be the regional headquarters for most multinationals managing their businesses in the region. There are about 4,000 foreign companies with offices registered in Dubai and as at June 2005, a total of 3,798 companies had regional operations in Hong Kong.

Dubai is also an aspiring international financial services centre. In its quest to become the Hong Kong of the Middle East it set up The Dubai International Financial Centre (DIFC) and has built on this by launching the Dubai International Financial Exchange (DIFX) on September 26 last year. Although only one company has listed on the exchange so far, it is claimed that 15 more will list throughout 2006.

In comparison, Hong Kong’s stock market is the second largest in Asia and the ninth largest in the world in terms of market capitalisation. Such a wide gap clearly illustrates how far Dubai has to go to reach the big league. As at November 2005, there were 1,124 companies listed on the Hong Kong stock exchange, including 202 companies on the growth enterprise market (GEM). The total market capitalisation of Hong Kong’s stock market reached $1,029.7 billion at the end of November 2005.

Hong Kong is also the third largest foreign exchange market in Asia and the sixth largest in the world with the net daily turnover of foreign exchange transactions reaching $102 billion in 2004, according to the Bank of International Settlements. This includes very active and prosperous fund management and venture capital industries. Hong Kong is the second largest venture capital centre in Asia, managing about 27 per cent of the total capital pool of the region. These industries are yet to develop in Dubai.

There the similarities between the two economies end. Scratch the surface and the differences loom large. While both economies are experiencing strong growth, their cost base is markedly different. Hong Kong has an official predicted inflation rate of one per cent for 2005 while Dubai has an unofficial rate of about 22 per cent.

The contribution of Mainland China to Hong Kong’s success is also enormous. Hong Kong’s transition from a predominately manufacturing economy to a services- based one has been prompted and facilitated by its much larger neighbour. China is the world’s fourth largest economy with a population of 1.2 billion. In 2005, the economy grew 9.9 per cent. In contrast, the largest markets to which Dubai has immediate access have relatively small populations by comparisons- 70 million in Egypt and Iran and 26 million in Saudi Arabia.

In every other respect too, China is a key driver of Hong Kong’s economy. According to 2004 trade statistics, about 22 per cent of the mainland’s foreign trade was handled by Hong Kong. In 2004, 60 per cent of re-exports originated in China and 45 per cent were destined for the Chinese mainland.

Mainland China is also the largest foreign direct investor in Hong Kong’s economy, excluding tax havens, accounting for 29 per cent of the total investment. On a broader level, Hong Kong is ranked as the second largest recipient of inward foreign direct investment (FDI) in Asia and the seventh in the world in 2004. And while world FDI inflows grew by two per cent in 2004, inflows to Hong Kong surged by 150 per cent to $34 billion in that year. In turn, Hong Kong is the largest investor in Mainland China and the largest source of outward FDI among Asian economies and the seventh in the world in 2004.

Hong Kong’s success in attracting FDI is something Dubai certainly wants to emulate. Equally, Dubai would like to attract a share of the significant levels of FDI flowing from Hong Kong. To capture some of this market, and to promote the advantages of Dubai as a commercial and financial services hub, the Dubai government last month opened the Hong Kong office of the Dubai Development and Investment Authority (DDIA). One of its stated aims is to increase the share of Hong Kong’s international investments, estimated to be worth more than $350 billion.

Dubai’s policymakers should bear in mind, however, that Hong Kong is known, not just for its free trade in goods and services, but also for its effective and transparent legal structure, including its strong ownership rights. The financial and commercial sectors are also founded on a high degree of accountability, transparency, compliance and corporate governance. These are not things for which Dubai is yet known, especially among homegrown companies. Recent efforts by the Dubai International Financial Centre (DIFC) suggest this is changing, however.

Equally important is the fact that Hong Kong is praised for its strong overall protection of intellectual property rights (IPR), particularly in Asia, and its tough crackdown on optical disc pirates. The Office of the US Trade Representative regularly cites Hong Kong as a model in Asia for its ongoing efforts to resolve issues relating to IPR protection.

Given these challenges, it will take a Herculean effort on the part of Dubai’s government and commercial and financial sectors, for the emirate to achieve the international recognition as a financial centre and trading hub that Hong Kong has achieved.

Dubai’s success in moving from an essentially oil-based economy to a more diversified one in a relatively short time must certainly be admired. But to move to the next level, as a leading player in the commercial and financial world stage, will take more than merely money and faith.

It will take not only time, many years in fact, but also a concerted effort to ensure the law adheres to international expectations, especially in terms of its enforceability; that intellectual property rights are well protected and that companies and other organisations are subject to a high degree of accountability, transparency, compliance and corporate governance. These requirements are essential if Dubai wants to attract the high level of foreign direct investment it so wants and is to become the financial and commercial hub - in other words the Hong Kong — of the Middle East.