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A tale of two Chinese citiesShanghai-Hong Kong debate may pivot on economic developmentBy Marianne Bray Editor's note: CNN International TV brings its global resources to China in early April for its "Eye on China" special programming.  Shanghai's economy is growing faster than Hong Kong's. SPECIAL REPORTYOUR E-MAIL ALERTSHONG KONG, China (CNN) -- In December 2003, Chinese-American James Ku helped establish a start-up in Shanghai, promoting Chinese business to American investors. The 24-year-old was the perfect candidate to reap the benefits of a new China and a booming Shanghai, a metropolis that in the minds of many, was set to take over from its southern sister Hong Kong. From his high-rise office in the Shanghai Bund International Tower, he looked out over the colonial architecture of the Bund and across the Huangpu River to the Bladerunner-skyline of the new city of Pudong. "I liken it to watching a sporting event from a sky box," the Harvard graduate recalled of the "moving postcard" outside his window and his compulsion to grab a piece of Shanghai's phenomenal growth before it passed by. But his tale became a warning of what can happen to newcomers in a fledgling economy after four decades of isolation. "I couldn't figure out what the truth was ... It was a new business environment and there was no means to verify anything. It was hard for people to be credible," Ku says. Ku says the view of the Shanghai building became a visual illusion, and he later learned the flashy facade of his tower gave "legitimization for a flimsy operation." By May 2004 he had pulled out, a casualty of what he called fraud, deception and general incompetence in a gray economy. In a bid to pave the way to prosperity for its 1.3 billion people, China has promoted capitalism with socialist characteristics, a hybrid model run by Communist leadership that doesn't come with a clear blueprint, experts say. "One of the problems in China is you have an ideological system that clings to the idea that Marxism is relevant to the future," says Anthony Saich, a China expert at Harvard University. But despite what some experts have described as a brutal phase of early capitalist development, many companies have thrived in a Shanghai economy that grew 11.1 percent last year, capping 14 straight years of double-digit growth. Pierre Cohade, Asia president of Goodyear Tires moved from the America to Shanghai in June 2005, attracted by the pool of talent. He also wanted to be close to his customers and in a place he saw as the center of gravity in 10 to 20 years time. "You have to be wise about it," he says. "Enforcing legal rights is an art versus a science, but it will increasingly become a science as China progresses." Hong Kong: Another Chinese city?South of Shanghai on the flank of China's east coast is the entrepot of Hong Kong, a territory seen as a model of economic freedom that has thrived on being a gateway into China. The former British colony has had its obituary written many times since the 1950s -- by the Communist revolution next door, the loss of manufacturing jobs across the border and an exodus before its handover to Chinese rule in 1997. It was further dented by the Asian financial crisis and the deadly SARS epidemic. The latest threat could very well be Shanghai, a city attracting businesses wanting to get closer to the ground. Shanghai is also fast attracting research and development activities, says Jeffrey Bernstein, chairman of the American Chamber of Commerce in Shanghai. But even as Hong Kong struggles with its raison d'etre, it is not taking it lying down. Ranked the freest economy in the world for the 12th year by conservative Washington think-tank the Heritage Foundation, it is busy both defending itself and reinventing itself to capitalize on being reunited with the world's fastest growing economy. Under the "one country, two systems" arrangement with China, Hong Kong has a high degree of autonomy from the Communist party and has held onto its strong rule of law. Invest Hong Kong, a governmental promotion body, boasts of the city's know-how, unfettered flow of information and capital, clean and efficient governance with limited interference, simple and low taxes and global outlook. The city of 6.9 million is leading the race between the two, experts say. Shanghai's share market has been likened to a casino, says Saich, with no transparency, freedom of information or capital mobility. It is dwarfed by Hong Kong's high-end financial, services, transit and tourist prowess, which is vital to China. Chinese companies use it as a window to the world, while overseas firms look to it to tap into the mainland market. It is a top foreign direct investment destination, attracting $34 billion in 2005, much higher than Shanghai's $6.8 billion; and wages in Hong Kong far exceed those in the northern city. The capitalist enclave also taps its location to be a pan-Asian hub. In 2005 Hong Kong was home to 3,800 regional headquarters, a rise of 189 percent over 2004. Shanghai has 124 multinational headquarters, up from 86 in 2004. New Yorks of Asia?While much has been written of the rivalry, economists say they feed off each other and there is room for both in the economic powerhouse of the 21st century. After all, the United States has New York, Los Angeles and Chicago. This view is echoed by China's leaders, who say the cites are "complementary and mutually reinforcing." In addition to boosting Shanghai, China has used trade deals and allowed more mainland Chinese to visit Hong Kong to prop up the beleaguered city. Both cities have also become windows to their hinterlands and to China's "twin engines" -- the Pearl River Delta and the Yangtze River Delta, home to a combined 400 million people. Keen to cater to the "world's factory" after nearly nine years under Chinese rule, Hong Kong is touting itself as the financial and investment center for the Pan-Pearl River Delta, an area that includes nine neighboring provinces, along with Macao and itself. At a March forum, Hong Kong was busy selling its stock market, the second largest in Asia after Tokyo, to top brand names that herald from the region. What's real?The key, Bernstein says, is what happens in areas of the two cities' economies that don't need to be repeated in such close vicinity. "When there are many more retail investors and funds in Shanghai, is Hong Kong still going to be the place of choice for financing?," says Bernstein, also managing director of Emerge Logistics. Some economists say Shanghai could be the hub for domestic capital raising, with Hong Kong as the global financing center. Still Shanghai's road to reform is full of doubts -- will its legal system and markets be allowed to mature in a socialist market economy and will China be able to contain unrest? As for Ku, he has learned much about working out what's real behind Shanghai's facades. "Don't get blinded by the numbers .... do a lot more due diligence," he advises, adding he would love to be go back. 
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