Relations between Hong Kong and the central government have been gone through some stormy waters recently. As well as signs that people in Hong Kong are less than delighted with the proposed constitutional arrangements for the 2017 Chief Executive elections and the future of "One Country, Two Systems", there has been discontent over border trade which has given rise to some bad feeling. But the abiding principle of the new China is that political disputes are best addressed by establishing a firm economic interdependency to concentrate minds on the serious business of a mutually beneficial coexistence.

The central Chinese strategy for the short- and medium-term future is the "Silk Road" initiative, providing a network of trading and financing relationships linking East Asia to the West; the two branches of this strategy are the land-based "belt", comprising those centers originally served by the historic "Silk Road" and the "maritime Silk Road". This is combined in what is called the "One Belt, One Road" initiative. The financing of many of the projects making up this strategy is to come under the newly founded Asia Infrastructure Investment Bank (AIIB), most of the finance for which will inevitably come from China.

On the face of it, one might expect such a program to feature Hong Kong as a central component; after all, the territory has long been an entrept for regional trade, as well as being China's principal outpost on the South China Sea and the maritime routes east, west and south. Hong Kong may, for the moment, be the world's principal financial, trade, and services gateway to China. But in the current climate the SAR should not take anything for granted - the territory will have to fight for its position in the new design.

Hong Kong cannot be complacent about its advantages, in particular its wide range of professional services and financing options for China's trade with the outside world; it must keep developing, improving and expanding these. One of the opportunities to be grasped is that presented by the Chinese agenda of renminbi internationalization and capital account convertibility. It is inevitable that China's paramount position in the financing of the AIIB will lead to an expansion of the use of the renminbi at the expense of the dollar; the Chinese currency already holds second place in international trade finance, and China may not be content with that in the long term. Widespread use of renminbi in the context of AIIB projects will be attractive to other participating countries too, as it will reduce their currency exchange risks.

Hong Kong has a major advantage here which it must not let slip, being the principal center for offshore renminbi business; nowhere outside the mainland is there a larger renminbi liquidity pool. Last year, Hong Kong handled renminbi trade settlement to the value of 6.3 trillion yuan ($1 trillion) - an increase of over 60 percent on 2013. The "One Belt, One Road" initiatives will provide the potential for even more impressive increases. But it would be a mistake to assume all this business will automatically come through Hong Kong. Other centers will develop; the mainland will be keen to develop a variety of facilities, which will be expected to compete against one another to encourage innovation and growing service quality. Bond issuance is another historic Hong Kong strength. Competition will be encouraged in this area too.

The linking of Hong Kong and mainland stock markets is an example of how geography is gradually being taken out of the equation, undermining one of Hong Kong's principal advantages. The Shanghai-Hong Kong Stock Connect already provides a new channel for the cross-border use and circulation of renminbi, and it is expected to be joined by a similar connection between Hong Kong and Shenzhen later this year. Of course these can be seen as underpinning Hong Kong's status as a global hub for renminbi financing: But in the slightly longer term potential competitors will benefit too, risking Hong Kong's marginalization if the territory does not keep up to the mark.

The author is a former UK diplomat specializing in China. He spent nine years as an analyst in Beijing. He now works as a freelance writer and commentator.

(HK Edition 06/01/2015 page1)