One view says Hong Kong will become the world's largest capital market serving the fund raising needs of the entire greater China region. The other sees decline as Shanghai eclipses its southern neighbour. As ever, reality probably lies somewhere in between. Hong Kong's financial markets have got bigger, deeper and more sophisticated since the nadir of the October 1987 stock market crash. Where they go from here will go far in deciding the economic success of the soon-to-be Special Administrative Region. The past year has offered pointers. Red-chip firms have permanently changed the composition of the stock market. Their arrival raises regulatory conflicts that will inevitably surface once the speculative froth settles. How Hong Kong accommodates the capital raising demands of China while remaining an investor friendly haven will be crucial. Perhaps the best outcome of the 1987 debacle, which resulted in the imprisonment of the stock exchange chairman, has been making it a market for all rather than an insiders club. Recent months have tested that proposition with syndicate ramping of China-related stocks a daily ritual. Regulators have been hard-pressed to voice concern while not bad mouthing the territory. Even the most generous spirits must worry about the asset quality within many new listings. Hong Kong wants to establish itself as the natural fund raising hub for Chinese enterprises. Financial centres establish a critical momentum that, once achieved, is hard to stop. The question is how far does it bend? Recent months must have been some of the most torturous for the stock exchange listing department. Dealing will ropy valuations and inadequate due diligence has been a daily trauma for officials who frequently are told a company candidate can always take its listing elsewhere. Of course, caveat emptor has always applied in Hong Kong. Despite the clean-up, tightly linked webs of family controlled firms means it remains driven by insiders. Bull markets bring excess everywhere and the aftermath of this one will no doubt see regulatory breaches. Could it be that running a capital raising centre for Chinese companies is not possible without compromise? After all, can vast tracts of state-owned Chinese industry really be privatised overnight without compromising international accounting standards? Are we all being horribly naive about paying lip service to a creed of international best practice that must inevitably be watered down? Such questions must trouble the Securities and Futures Commission. It knows well enough the importance of Chinese firms to market development, but realises that modern financial markets must first defend the interests of investors. Chinese policy makers have grown used to faddish enthusiasm among foreign investors for its companies. Having seen the stampede to buy H shares in late 1993, followed by a mass exodus, it knows only limited opportunities exist to suck in much needed capital. Here lies the great contradiction. Many Chinese companies still see capital markets as nothing more than a tool for raising cash. Investors remain subordinate to that aim and regulations are there to be avoided where possible rather than be adopted as a life creed. The hope must be that mainland firms in Hong Kong absorb the new regulatory lifestyle and are forced to pay the price for unacceptable breaches. If Hong Kong once again becomes a speculators' casino and capital raising parlour for opportunists the future is bleak. Listing Chinese companies offers huge opportunities. Companies run head offices in their listing centres, business is done, professional services are needed and brokerage commissions are earned. Hong Kong cannot afford to miss that opportunity. But it cannot do so at any price, certainly not if it harbours ambitions to be the world's largest capital market.