As Hong Kong enters its second decade under China's "one country, two systems" arrangement, the territory's residents ponder their place in a growing economic giant.  Hong Kong appears to be losing its edge as the premier business city in China.

The heart of Hong Kong's economy remains unchanged since the city reverted to Chinese rule in 1997 -- property prices are rising and the stock market is reaching new highs.

For decades, Hong Kong served as a gateway to a China that was largely closed to the rest of the world, and lacked the infrastructure and skills to handle international trade.

That is changing.  As Chinese cities open up and develop, Hong Kong's unique role is fading and it increasingly must compete with the rest of the country for investments, trade, talent and technology.

Since its return to Chinese rule, the former British colony has retained its capitalist economy and a high degree of political autonomy.

But Ming Chan, a Hong Kong expert at Stanford University in the U.S., says that in its economic integration with the mainland, Hong Kong has struggled.

"The rise of Shanghai, even Guangzhou reduced Hong Kong's uniqueness. Hong Kong had to be increasingly more sensitive, more aware of the opportunity, the requirements to operate in the China market as now part of China rather than in the old days as a colonial entity,? says Chan. ?So in some sense Hong Kong had to recalibrate vis-à-vis China that is growing, that is helping to underwrite Hong Kong's prosperity."

China's economic rise is changing Hong Kong far more than people had expected.  In the past, Hong Kong money helped fuel the economic boom in southern China.  Now, Chinese money floods into Hong Kong.

Financial Competition

Mainland companies account for half of the Hong Kong stock market's capitalization, up from 16 percent in 1997.  More and more Chinese companies are using Hong Kong as a jump-off point for international expansion.  They are tapping Hong Kong's financial expertise to help them meet Western corporate standards.

Hong Kong companies remain the single biggest group of investors in the mainland. But a growing number of Chinese millionaires are snapping up luxury apartments in the territory. Mainland visitors have become a major source of tourism dollars in the city.  

But while Hong Kong profits from China's economic development, some residents fear it could hurt the city.

A recent survey of business executives by the private Better Hong Kong Foundation shows that Shanghai is fast narrowing the gap with Hong Kong in terms of investment environment and as a base of operations.  In the first quarter of the year, Shanghai's container port eclipsed Hong Kong as the world's busiest.

No longer the gateway to China, what then is Hong Kong?

Hong Kong's leader, Donald Tsang, acknowledges that times have changed. "We are acting more like a revolving door, bringing trade and investment into and out of the mainland," says Tsang.

Tsang wants Hong Kong to cast its net wider -- to be an international financial center on par with New York and London.

A Bright Future?

David O'Rear, chief economist for the Hong Kong General Chamber of Commerce, says the city has more to offer than just being part of a rising economic power.

"It's the international business and financial center for half of the world,? says O?Rear. ?In that part there is China, there is also Korea, Taiwan, Vietnam, Malaysia and Thailand.  China is a huge component but it's not going to be a defining factor of what Hong Kong does in the future.?

But to live up to its slogan "Asia's World City", Hong Kong has to sharpen its competitive edge.

Business leaders and analysts say Hong Kong needs to invest in people and technology, and continue to attract foreign talent.  Business people complain that worsening pollution and the scarcity of places in international schools make it hard to attract foreign experts to Hong Kong.

But Hong Kong business leaders stress that the city is the only place in China where the rule of law prevails, transparency exists and efficiency rules.  They point out that no mainland city offers the same environment.  Not yet.

This story was first broadcast on the English news program, VOA News Now. For other Focus reports click here.