The fear of becoming irrelevant has crept into Hong Kong's psyche. In the past month, two of Hong Kong's paramount leaders, Chief Secretary Raphael Hui and Monetary Authority's Chief Executive Joseph Yam, separately warned that Hong Kong could be rendered irrelevant by the rapid development of various mainland cities in neighbouring Guangdong and beyond.

Such a scenario is a distinct possibility. In fact, it is fast becoming a reality in certain economic sectors. The rapid development of container port facilities in Shenzhen, for instance, is posing a long-term challenge to Hong Kong as a premier trans-shipment centre for exports from the highly industrialized Pearl River Delta region.

Yam at the Monetary Authority, of course, has other worries. He cautioned that the maturity of the financial markets on the mainland could seriously undermine Hong Kong's position as the major intermediary of foreign investment in Chinese enterprises.

Neither Hui nor Yam have suggested any specific solutions to the problems they raised. But their cautionary remarks have stirred a lively debate in business and academic circles on the direction Hong Kong should take in shaping its economic future.

So far, none of Hong Kong's institutions of learning and well-funded economic think tanks have come up with a comprehensive study that identifies the specific challenges Hong Kong is facing, and listed the areas where improvements need to be made. Without such a well-researched and documented study, any attempt to find a long-term solution would seem to be nothing more than a shot in the dark.

Naturally, many of the comments made by business people, economists and politicians have been too general to be of any value.

Such a lack of vision is a reflection of the short-sightedness that prevails throughout all social and economic sectors. Economists here have long argued that the almost total exposure of the Hong Kong economy to outside influences has rendered long-term planning meaningless. In the past, the built-in automatic adjustment mechanism of Hong Kong's export-oriented economy meant that the average duration of an economic cycle would be no longer than five years.

This may be changing. Hong Kong is now a service-oriented economy with the services sector accounting for about 80 per cent of its gross domestic product. Although the export sector has continued to be an important engine of growth, the bulk of Hong Kong exports now consists of the re-export of goods in and out of the mainland.

What's more, the currency peg has largely distorted the economic adjustment mechanism, which works mainly through the exchange rate. With the Hong Kong dollar exchange rate pegged to the US currency, any economic adjustment has to be reflected in asset prices, and, as we all know, the asset market is much less efficient than the foreign exchange market.

Hong Kong is just beginning to recover from an exceptionally long recession that was triggered by the outbreak of the Asian financial crisis in 1997.

This seemingly new economic phenomenon has prompted discussions among some economists about the need for a major rethink of Hong Kong's economic policy with particular emphasis on the role Hong Kong plays in the development of the mainland economy. But as Hui and Yam so forcefully noted, Hong Kong's role is far from assured.

Hong Kong can never hope to compete on "hardware" with mainland cities where supply of land and labour is plentiful.

To maintain a relevant role in China's economic development, Hong Kong needs to ask itself what "software" it can offer to attract business from mainland enterprises. Such "software" includes a range of professional expertise, well-regulated capital markets, a fair and equitable legal system and a relatively corruption-free government.

The answer to the relevance problem may lie in building on Hong Kong's existing strength rather than making risky changes.

Email: jamesleung@chinadaily.com.cn

(China Daily 04/04/2006 page4)