Tsang's Islamic finance centre bid may end up in quicksand

PUBLISHED : Tuesday, 08 April, 2008, 12:00am
UPDATED : Tuesday, 08 April, 2008, 12:00am

'Indeed, Dubai IFC [International Financial Centre] and Hong Kong have much in common as financial centres. We have both built and developed our financial architecture around our core belief in the free market. Our regulatory frameworks and financial markets follow the best international standards and practices. The transparency and efficiency of our financial markets are key strengths in the eyes of market players.'

John Tsang Chun-wah,

Financial Secretary (occasionally)

The trouble with having a boss man system of the sort we have in government is that the boss man can easily come to think it is time to ease God aside and take charge of the future, ignoring in our case that 7 million other people each have as good a view of the future as he has.

Our boss man was fretting a while back about how the Hong Kong economy could sustain itself should mainland cities ever decide to push us out of the way in trade and financial services. They always talk big in Shanghai about doing it, as you know, lots of hot air right since 1949.

And our boss man clearly told himself to think outside the box on this big question because, when his answer came, it was indeed way outside the box, so far outside of it, in fact, that he left not only the box behind but also most of his subjects. Let's do something really new, he said. Let's make ourselves a centre of Islamic finance.

We know that he left most people behind on this idea because his underlings subsequently found themselves very busy answering their big question - 'Ummm ... ahhh ... what's Islamic finance then?'

It is, of course, a way of removing the word 'interest' from the business of lending money as Islam forbids interest payments. What you do instead is call them 'capital gains' and all is fine once more. You must never be quite so plain in explaining it, naturally, but there you have the nub of it.

And the beauty of it for us, thought our boss man, is that there is lots of it to be done because Islamic economies are resurgent. It is also all new business for us, and we won't have to worry about competition from New York investment banks as America is not particularly in favour at present in Muslim countries.

Right then, so where do we start?

Well, perhaps let's talk to the biggest financial centre in the Middle East and see if we get any ideas there. Good. Where would that be then? Hmmm ... let's do a survey of square feet of office building under construction. Our boss man is incapable of taking any idea past the stage of pouring the concrete and this should therefore satisfy him as a definition of financial centre. Yes, here we have it. Our answer is Dubai.

Let us thus call on the financial secretary to stop being financial secretary for a spell and take on the job of chorus leader. Sing us the Dubai song, Mr Tsang. Sing it with gusto.

Now, I must agree with him that Dubai and Hong Kong have some things in common. Dubai's boss man is also incapable of thinking past the concrete pouring stage. The only difference is that Dubai's pours more concrete and is more reckless of the consequences as he has more money to spend. It's his own.

But as to the actual similarities in the real requirements of a financial centre, I refer you to the Heritage Foundation's widely recognised Index of Economic Freedom, which ranks the United Arab Emirates at 63, well down a scale on which Hong Kong is No1.

The UAE's ranking drops even further for such key financial centre attributes as business freedom, investment freedom and property rights. The foundation also reserves some choice words for the UAE, such as 'incompetence and corruption are rarely challenged'.

So the only way for Dubai to put itself in contention as a financial centre is to create the financial equivalent of a free trade zone, the DIFC, and then put pressure on foreign banks to set up office there.

The bankers have no difficulties with this. They know exactly how to do it - erect the bank's logo in big brilliant neon where it can be seen from the airport, put in three juniors, two of them local hires, give them scissors to make paper chains and, having thus met all obligations, ask Dubai's boss man for more royal money to manage.

What it comes down to for the DIFC after this is a race for the regulatory bottom. With the buildings built and the token offices set up, Dubai has nothing to offer other than a blind eye to the cross-border financial doings of anyone who goes there, which is precisely the role it has always played on a smaller scale for hundreds of years.

They'll deny it, of course, but don't fool yourself. Dubai is an entirely contrived financial centre, which can only achieve the full scale of its ambitions by adopting low standards. Don't expect American regulatory authorities to ignore this if they think it breaches their money laundering rules.

Indulge yourself if you choose, Mr Tsang, in illusions of making Hong Kong an Islamic financial centre but please don't risk Hong Kong's reputation by getting too close to Dubai. There's danger for us in those sands.