HONG KONG (MarketWatch) — Hong Kong’s model of crony capitalism is facing increasing pressure. But is it likely to get something better, or find it replaced with China’s model of state-capitalism?

Right now, it appears no one is happy with the way the territory is being governed — not Asia’s richest tycoon Li Ka-shing, not “Occupy Central” protesters camped out in downtown Hong Kong.

Central to the debate is mainland China: How does Hong Kong find a workable path forward as it integrates ever closer with its giant mainland neighbor?

On the one hand, there is a groundswell of resistance building to the seemingly overpowering influence of the world’s most populous nation, due to the sheer volume of visiting tourists and shoppers. On the other hand, there is a realization of mutual economic dependence, as not just mainland China’s people, but its currency and companies, increasingly pivot outwards.

It is clear Hong Kong and the mainland need to get along, but on whose terms?

Will Beijing use Hong Kong as a means to integrate into the outside world, or subsume the Special Administrative Region in its own image. Various areas of cross-border integration, including transport infrastructure, currency and — most recently — stock markets, are all proving controversial.

Hong Kong had 50 years of autonomy guaranteed when Britain handed it back to China in 1997, yet this could effectively be circumvented if its government appears to be compliantly following the policy preferences of Beijing. The path to democratic reform promised for 2017 looks set to be bumpy.

There has been considerable attention given to rumors that Asia’s wealthiest tycoon, Li Ka-shing, is unhappy with the direction Hong Kong is taking and is ready to invest his money elsewhere.

Last weekend, a mainland Chinese think tank waded in, saying Hong Kong’s competitiveness would be damaged if Li were to reduce his investments in the city. This has prompted much speculation as to what is driving this intervention.

The China Academy of Social Sciences (CASS) in its annual “blue paper,” says that if Li and his group frequently sell assets in the latter half of this year, it could affect Hong Kong’s overall business competitiveness. They also add that soaring property prices and a lack of innovation are other risks to the city’s growth.

These observations are not new but are typically recognized to be connected: The degree of rent-seeking in an economy dominated by large businesses being a direct factor contributing to the limited degree of innovation and high property prices.

Another way of explaining grumbles by Li is that it is more about a businessman lobbying to prevent change in the status quo to a less favorable business environment.

The Economist recently highlighted that Hong Kong tops its global ranking (by a huge margin) in terms of crony capitalism index. If policy change means loosening the grip wielded by Li and other tycoons, it should boost Hong Kong’s competitiveness.

But what exactly is the point the CASS is making?

Perhaps it should come as no surprise that a mainland Chinese think tank is not championing policy based on free markets. At the moment, China’s economic orthodoxy is dominated by large, state-owned monopolistic groups which typically promotes national champions and limits private and foreign entry.

In some ways, Hong Kong has a similarly monopolistic structure in industries like utilities and property, except that ownership is with private families rather than the state.

This might explain why CASS naturally believes there is merit in maintaining large-sized industry groups such as Li’s Hutchison and Cheung Kong.

In Afghanistan, spring brings Taliban offensive

Yet this argument also poses problems for local tycoons. If China were to impose its natural economic structure on Hong Kong, we would expect to see more state ownership of large businesses, rather than bringing in more competitors. Perhaps this will be the end game for Li and other tycoons: They will have to make way for Chinese state interests.

Indeed, there are already some warning signs.

Hong Kong mobile operators have being up in arms by an apparent move by the government to roll out the welcome mat for China Mobile 941, +0.09% CHL, -0.61% to enter the 3G market by requisitioning their spectrum.

Another policy that many believe was been enacted at Beijing’s behest is the largely unexplained decision to restrict new entrants into the television market, after refusing newcomer HKTV a licence.

For market participants, these issues matter more when they start to impact stock-market performance. It is notable Hong Kong Exchanges and Clearing 388, +0.70% HKXCF, +0.25% appears to be moving ever closer to mainland China as it retreats from international listings and focuses more on state-owned Chinese listings and developing yuan trade. A series of poorly performing IPOs and the botched listing of China’s WH Group have all raised concerns.

Running stock markets is certainly not something Hong Kong wants to take lessons from mainland China in. Ultimately, Hong Kong needs to strike a balance between integrating with China while not losing its private-sector edge where it has one. It should only swap its crony capitalism for something better.

More MarketWatch news:

Jaffe: Proof most investors are clueless

Reeves: Higher rates are coming — here’s how you prepare

China housing apocalypse: Could it happen?