HONG KONG (AFP) - Hong Kong's status as a financial powerhouse is under threat, analysts say, after plans for China's first free-trade zone revealed a large-scale push to create a new international hub.

Draft proposals for the zone in Shanghai, seen by AFP, showed it goes beyond greater liberalisation of trade to take in investment and financial services - including free currency convertibility.

Chinese Premier Li Keqiang, who took office in March, is backing the FTZ, which his cabinet approved last month.

"They want an offshore harbour, basically like Hong Kong," said a financial industry executive briefed on the plans.

Hong Kong analysts say the city - which promotes itself as the business gateway to the world's second-largest economy but is facing challenges such as high labour and rental costs - must now rise to the challenge.

"In one to three years time, if Hong Kong cannot revamp itself, it will lose its competitiveness to the trade zone," chief China economist of ANZ Banking Group, Liu Ligang, told AFP.

Shanghai flourished during the period of stellar economic growth overseen by president Jiang Zemin, a former mayor of the city, as doubts were cast over Hong Kong's ability to retain its status as a trade and finance hub after the handover from Britain to China in 1997.

But after Jiang retired from the last of his national posts in 2005 several members of his powerful "Shanghai Gang" political clique were dismissed in corruption trials, widely seen as a move by new president Hu Jintao to rein in the city's powerbase.

With Mr Xi Jinping taking over from Mr Hu in March this year, it seems that Shanghai may be back on the map, at a time when mainland critics are increasingly gunning for Hong Kong over anti-Beijing democracy protests.

Hong Kong has sought to become a major offshore management market for China's yuan - also known as the renminbi - but the opportunity for free currency exchange offered by the new FTZ will draw business to Shanghai.

"Some of the businesses in Hong Kong could be shifted to the free-trade zone if people don't need to use Hong Kong banks anymore," warned Liu.

"Hong Kong's renminbi assets could also flow to the trade zone."

Officials in Hong Kong, a semi-autonomous region under Chinese rule, remain confident and say it offers a unique bridge for international businesses.

Nevertheless, Sung Yun-wing, director of the Hong Kong Shanghai Development Institute, told AFP the Shanghai FTZ will serve as a "wake-up call".

"Hong Kong has to face international global competition, whether from Shanghai or New York and London," he said.

The city "should concentrate on building its strength, rather than fretting about Shanghai", Sung added, citing rule of law as a major advantage when competing with China.

ANZ's Liu also believes that, in the short term, Hong Kong has attributes that will help it withstand competition from the FTZ.

"Hong Kong has an effective regulatory institution and its rule of law is well respected. It will take time for the trade zone to develop as it is starting from scratch," he told AFP.

But Hong Kong's long-term prospects as an offshore business centre to China will need a proactive approach including reducing business costs, says Liu.

"I think it's clear Hong Kong will face pressure of competition from Shanghai," Shen Minggao, Citibank's chief economist for Greater China, told AFP.

"Hong Kong should take advantage that it has been the first mover in China's financial sector. If it doesn't do that, it will be waiting for Shanghai to catch up and let Hong Kong be marginalised."

According to China's Ministry of Commerce, the 29-square-kilometre FTZ comprises four existing areas in Shanghai: the international airport, deepwater port, a bonded zone and a logistics area.

The draft plan said the new zone would support the establishment of foreign and joint venture banks and welcome privately funded financial institutions.

At present China's banking sector is overwhelmingly dominated by state-run institutions.

The FTZ project as a whole "will be a bold step to escalate China's economic development to the next level", an ANZ research report this week said.

Under British rule, Hong Kong was transformed into one of the freest world economies and an international finance centre, outpacing economic development in Chinese cities.

Hit by the Asian financial crisis of 1998 and the 2003 SARS epidemic, China turned its focus on boosting the Hong Kong economy, while at the same time developing the Pudong financial district in Shanghai.

A scheme allowing residents of wealthy Chinese cities to travel to Hong Kong and an economic partnership to strengthen trade and investment were among measures introduced.

But as the city's growth was again hit by the effects of the 2008 global financial crisis, Shanghai's economy surpassed Hong Kong in 2009 in terms of GDP as Chinese stimulus focused on averting a national crisis.

In 2008 China unveiled an unprecedented four-trillion-yuan (S$827 billion) stimulus package aimed at boosting domestic demand as exports plunged amid the global financial crisis.