If there is one place that understands the influence of China, it is Hong Kong. Business correspondent Joanna Geary visited the area to experience its draw.

Faced with cheap labour over the border, Hong Kong saw the start of a rapid decline of its manufacturing base over 20 years ago.

Realising it was a battle it could not win - labour costs in China are one tenth of those in Hong Kong - the region forged a reputation as a broker between its Communist neighbour and the rest of the world.

But in 1998, the first year of reunification with China, Hong Kong was hit by the Asian financial crisis, resulting in a five per cent drop in its GDP.

In 2001, its recovery was derailed by the world economic downturn and compounded in 2003 with the outbreak of the respiratory disease Sars.

It was a tough period, as Helen Chan, principal economist for the Hong Kong special administrative region, explains.

"It was a difficult time for Hong Kong, but it did force us to undertake some helpful administrative changes and to encourage businesses to downsize and reassess, ultimately placing Hong Kong on a much sounder footing economically."

But the new century also brought with it an increasingly economically powerful China and saw the start of the battle between Hong Kong and Shanghai to become the country's financial capital.

But Ms Chan remains optimistic. For her, the future is about promoting the region's specialisms - stressing its reputation for high quality, service-based business.

Hong Kong relies on services for 90 per cent of its GDP - one of the largest proportions of any country in the world. And, according to Ms Chan, its international reputation in this sector is key to the future prosperity of Hong Kong.

"We need to build a Hong Kong brand that signifies excellence in professional and financial services.

"Why list your business in Hong Kong? Because that indicates a company has gone through a rigorous process overseeing its accounting and its governance."

Ms Chan admits there is increasing competition from other Asian cities, such as Tokyo, as well as Shanghai - something the Hong Kong administration is attempting to tackle.

"Shanghai is growing very fast - at around 10 to 15 per cent a year - but Hong Kong is also doing very well too.

"Shanghai is more domestic financial business, whereas Hong Kong deals with international, open, free, capital mobility."

Integration with the fastest growing economy in the world can only be good for Hong Kong, Ms Chan adds.

"As long a China's economy forges ahead it's a case of each region finding its niche and competitive advantage."

For better of worse, Hong Kong is currently one the best examples of the free trade model in the world.

Legislation is kept to a minimum, Hong Kong has no minimum wage and income tax set at a maximum of 15 per cent. Businesses also pay a flat tax rate of 16.75 per cent.

But this still allows the region to provide meanstested healthcare and 12 years of free education for its residents.

This education goes some way to fulfilling the region's need for skills upon which to develop its reputation. Here the region is using its connection to China to its benefit. Mainland "talents", such as university graduates from notable Chinese schools are some of the few people allowed to emigrate and live in Hong Kong. Unskilled Chinese workers are banned from settling in the region.

"We are trying to put the infrastructure in place to move to a knowledge-based economy," explains Ms Chan.

"There are lots of opportunities for immigration, but there are also immense challenges, the main one is the increasing competition within Asia.

"With globalisation, capital can move overnight - as we discovered with the financial crisis - and labour and businesses are mobile enough to follow it. We need to develop a strong economy and skilled workforce that will convince investors to stay."

Ms Chan says policies to promote these are already having an effect, with current unemployment rates at around four per cent, compared to 8.3 per cent in 2003.

The majority of these are unskilled workers who apparently no longer have a place in Hong Kong's service-based future.

According to Ms Chan, the majority of these disenfranchised workers have been retrained as clerks, retail assistants and restaurant staff in the new economic growth built upon the back of international trade.

But, with an average working age of 39, there is a question mark over how members of the older, unskilled, workforce are taken into account.

>The China Connection