Hong Kong has long been East Asia's financial center, a counterpart to London and New York in hosting the banks and brokerages that invest capital and facilitate trade. But the former British colony is facing stiff competition from other Asian cities.
Hong Kong's financial services industry has been built up over 150 years, giving it a huge head start over new rivals elsewhere in China and in other parts of Asia.
But now Hong Kong's economy languishes. The city, which returned to Chinese sovereignty in 1997, recovered quickly from Asia's financial crisis of the late 1990's. But in 2000, it was hit by the global collapse of high-technology stocks and the subsequent worldwide recession.
As stock markets around the world have fallen, investment banks in Hong Kong and elsewhere find little demand for their services - raising capital, syndicating loans, listing companies on stock exchanges.
Consumer prices here have been falling for four years. Housing prices are still 50 percent below their 1997 peak. Business confidence is sagging. And now Hong Kong finds other cities trying to muscle in on its international finance business.
Mike Rowse, the head of Hong Kong's investment promotion agency, identifies three cities that are challenging Hong Kong's dominance in financial services. "Singapore is an important financial center but it is a bit off center [geographically] and its hinterland, the ASEAN countries, is not as robust as we are," he says. "Tokyo is a very Japanese centric financial center. So, I guess the one most people are looking at within China would be Shanghai."
Like Hong Kong, Shanghai, about 2,000 kilometers to the north, is a coastal city adjacent to a vast export-oriented industrial area. It is in the midst of an enormous boom.
Still, Frank Martin, a banker who heads the American Chamber of Commerce in Hong Kong, is convinced that Hong Kong will retain its lead over Shanghai. "Yes, for one very good reason. And that is the legal system, the rule of law, the independent judicial system we have here in Hong Kong," he says. "And absent that in China, it will be very difficult for Shanghai - which has aspirations of being a major financial center - to really compete with Hong Kong."
China's extraordinary economic growth has created a boom all along its coast. Huge amounts of foreign investment are going into the region and Shanghai has already established itself as a major Chinese financial center. However, with the rule of law fragile and corruption still widespread, analysts say Shanghai is unlikely to overtake Hong Kong.
Simon Ogus is with DSG Asia, an economics research firm in Hong Kong. He says China must first overcome corruption to become a major player in financial services. "China has a major problem in that there is absolutely no intention of separating the state from the judiciary from the [communist] party. So therefore, unless you make that separation, I don't just see how you can deal with corruption systematically in the whole system," he says.
Mike Rowse with the investment promotion agency outlines why he thinks Hong Kong will remain China's premiere financial center. "We have a fully convertible currency with no restrictions on the movement of capital. We have a legal system that is essentially from the West that is based on the rule of law and administered by an independent judiciary," he says. "We have the total free flow of information. And finally we have private ownership of the banking system so that the government's sole role is to be a regulator and not to be a player and a regulator at the same time."
These fundamentals, says Mr. Rowse, characterize New York, London and Hong Kong, but apply to very few other potential financial centers in Asia.