The Allure of Hong Kong

UAE banks are flocking to Hong Kong to open branches, despite an overheated property sector and a volatile economy. GC investigates the attraction to China’s offshore financial centre.
Banks and firms in the UAE are expanding their businesses in Hong Kong, an offshore financial and trade hub for mainland China, in an attampt to bolster  its trade and economic ties with China, one of the main buyers of its crude oil and its number two trade partner.

Hong Kong, a former British colony that returned to China in 1997, is important to China for attracting foreign investment that can benefit from a looser economic environment than mainland China.

UAE banks, like their western counterparts, are lured by China’s ambition to cement Hong Kong’s position as an offshore hub for trading of the yuan.

UAE banks, like their western counterparts, are lured by China’s ambition to cement Hong Kong’s position as an offshore hub for trading of the yuan, also known as Reminbi (RMB).

This is part of their plan to promote the use of the Chinese currency in global trade and finance. China’s efforts have already paid off with the yuan overtaking the Russian ruble as the world’s No. 13 payments currency, according to SWIFT financial messaging platform. Offshore yuan centers such as Hong Kong, London and Singapore contributed to the rise of the Chinese currency, with yuan payments growing in value by 171 percent between January 2012 and January 2013, according to SWIFT.

The increased interest in yuan led Emirates NBD, the UAE’s biggest bank by assets, to issue in 2012 a so-called ‘dim sum’ bond, a security denominated in yuan that is issued outside mainland China. They are the first Arab lender to tap such paper.

The Hong Kong branch of the National Bank of Abu Dhabi (NBAD), UAE’s second-biggest lender by assets, followed suit and issued several ‘dim sum’ bonds last year. Dubai-based Mashreq Bank also has an office in Hong Kong and it started last year to offer yuan account services in the UAE to help Chinese suppliers invoice and receive payments from UAE buyers in the local currency. It will also help UAE firms negotiate better terms for goods and services from China.

China and UAE Strengthen Trade

China, the world’s second-largest economy, is marketing the greater use of yuan in cross-border trade in goods and services as it seeks to loosen control over its currency and open up its financial markets to foreign investment. And as trade flows between China and the UAE grow, banks are seeking to take advantage of the yuan business it generates.

“NBAD, being currently the only UAE bank who is granted the license by People’s Bank of China to engage in RMB offshore businesses in Hong Kong, is well positioned to tap on the increasing trade and payment flows between China, UAE and MENA region,’’ said Qamber Ali Al Mulla, Senior General Manager of International Banking at NBAD.

The UAE is Hong Kong’s largest export market in the Middle East, with exports to the UAE growing by 24 percent to $4.3 billion in 2012 from a year earlier, according to the Hong Kong Trade Development Council (HKTDC). Hong Kong’s imports from the UAE rose 36.5 percent in 2012 to $4.6 billion, led by telecommunication equipment and parts, pearls, precious and semi-precious stones and non-electronic engines, motors and parts, according to HKTDC.

Such trade flows have spurred greater business for UAE banks with operations in Hong Kong, who will have to serve exporters and importers.

“Currently, NBAD Hong Kong branch is primarily engaging in wholesale banking businesses with trade finance being one of our key product offerings, together with treasury and other general banking services,’’ said NBAD’s Al-Mulla.


Uncertain Future

But Hong Kong is not without its challenges. Its economy grew only 1.4 percent in 2012, slowing down from the 4.9 percent growth recorded a year earlier, with the European debt crisis weighing on the global economy. The International Monetary Fund is forecasting a growth rate of 3 percent in 2013 as the Hong Kong government increases spending and implements other measures to spur growth, while worries over European recovery ease.

However, Hong Kong has started to feel competition over yuan trade from Singapore and London as more markets seek a market share of the growing business.

“As with any international financial centre, Hong Kong is housed with over 140 licensed banks and thus competition is very severe among foreign banks and local banks,’’ said Al-Mulla.

“Being a laissez-faire port, the city is also exposed to external and increasingly mainland China’s economic trends. This, coupled with increasing operating overheads and talents competition have posted a very challenging environment for banks operating in the city.’’