Hong Kong has been shanghaied

Really, how much longer will bankers, investors and corporate executives feel the need to stop by Hong Kong on the way to China? Over time, going directly to the source of demand makes far more sense.

As more and more buildings appear in China, there may be less support for Hong Kong's all-important real-estate market. Economic growth might become more restrained and the city's credit rating could easily take a long-term hit.

There are, of course, reasons to hedge one's bets on China. Overheating risks abound as officials in Beijing grapple with the biggest increases in consumer prices in 16 months. Real interest rates are now negative, something that may skew incentives to spending. As household savings are eroded, consumers may react by purchasing property and stocks. The result could be new bubbles.

China's currency is another impediment. Until the yuan is fully convertible, its international use will be limited. For many, that leaves Hong Kong serving as a test bed for such transactions. The city ranked No. 3, compared with Shanghai's 10th place, in the September Global Financial Centers Index, compiled by consultants Z/Yen Group.

Shanghai's day is coming faster than many appreciate. It surpassed Hong Kong seven years earlier than projected by the government-backed Hong Kong Trade Development Council in a 2001 report. As Shanghai replicates Hong Kong's strengths, Hong Kong will only become less relevant.

It's not just Shanghai, but also Shenzhen. Sitting just north of Hong Kong, the booming city's population is already bigger. The skyscraper-strewn city is attracting capital that a couple of years ago might have gone to Hong Kong. And this forgets the several other cities dotted around China looking to become the next Shanghai or Shenzhen.

If there's a silver lining here it's the catalyst effect. Shanghai makes it harder for Hong Kong to continue resting on its laurels. It's no longer enough to rely on the arts and theme parks such as Disneyland and Ocean Park to boost growth. Walt Disney Co., by the way, is now moving into Shanghai.

A better idea would be to empower entrepreneurs who will not only create jobs but bring more buzz. Each year, the Heritage Foundation and the Wall Street Journal, which publish the annual Index of Economic Freedom, rank Hong Kong as the freest economy — perfect conditions for such entrepreneurs.

True, the city features the free entry of foreign capital, a first-world legal system and low taxes. It's also an economy of oligarchs; a handful of tycoons tower over it. Their dominance sucks up much of the innovative oxygen that could enliven the bottom half of the economy.

Unless China falters, Shanghai will be a growing problem for Hong Kong. That should concern investors betting on the city's future.

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