Is Hong Kong a Has-Been?

That's a big question here in Asia at the moment, not only because the city recently announced a dismal negative 7.8 percent GDP growth thanks to the financial crisis, but also because its days as Asia's financial capital may be numbered. There has been all sorts of speculation since the credit crisis began about which financial centers – NYC, London, Frankfurt, Singapore, Tokyo, etc – might drop down in the rankings post recession. What's ironic is that while Hong Kong was mostly insulated from the banking debacle because its institutions were not as exposed to credit default swaps and all those other funky instruments, it may be amongst the most vulnerable now.

That's not because of the crisis, but because Chinese officials announced firmly a few weeks back that they would like to see Shanghai become China's financial center. That's potentially very bad news for Hong Kong, which is almost entirely economically dependant on financial services, and its role as a gateway for investors into China. Some 60 percent of the market capitalization of the Hong Kong stock exchange and over 70 percent of its daily trading comes off the back of Chinese mainland firms. Most of these are large state run enterprises – the sort that leaders in Beijing could very easily order to re-list in Shanghai.

Hong Kong has adapted before – after all, it went from selling plastic flowers 50 years ago, to higher level manufacturing (eventually outsourced to the mainland when China opened up), to being a global financial capital. And, as a press official from the Hong Kong Stock Exchange told me today, "The fact that Hong Kong has a fully convertible currency (while Shanghai does not), as well as rule of law (also dubious on the mainland) remains a big advantage." This is true. But with at least some of its old business likely to move to Shanghai and Beijing, the city needs to move beyond trading. Some American business-men I've spoken to in recent days see a future for Hong Kong as a provider of consulting services to Chinese businesses – helping less sophisticated enterprises from the mainland figure out how to brand themselves and sell themselves to an international audience as they expand abroad. Others say it will become Asia's MBA hub.

Either way, it will need to deal with some of the governance problems and issues of vested interests that have plagued it in recent years (critics say Asian tycoons cut unfair deals here, and the city has yet to deal properly with its recent bond scandal). Hong Kong needs to at least keep up the perception that it's a fairer, better-governed financial capital than Shanghai. Otherwise, as former Chinese premier Zhu Rongji predicted a few years back, it may become Toronto to Shanghai's New York.