Hong Kong has retained its position as the world's freest economy, according to the 2008 Index of Economic Freedom by the US think-tank, The Heritage Foundation.
But Singapore is closing the gap, turning in a better performance than a year ago. The US think-tank praises Singapore's efforts to cut taxes and attract foreign investments.
Singapore has been scoring high in recent international ratings.
In a World Bank report last year, it was voted the world's easiest place to do business.
And leading business school IMD's World Competitiveness Yearbook describes the city as providing the world's most attractive investment incentives.
All that helped Singapore cement its position as the second freest economy in the world. It is still behind Hong Kong, but the gap is narrowing, with Singapore outperforming in five out of 10 key areas.
But The Heritage Foundation says state influence in the banking sector persists.
The Heritage Foundation's vice-president, Kim Holmes, said: "The key for Singapore, as we mentioned before, is reforming the financial services and their banking industries. They have a very high degree of government intervention."
He said that if Singapore were to reform the financial services and banking industries, it could give Hong Kong a real competition for the number one spot.
Despite foreign banks in Singapore having greater freedom to open branches and offer services, the government still seeks to maintain domestic banks' share of deposits above 50 percent.
The Heritage Foundation's director, Terry Miller, said: "The area of most concern to us, I think, is restrictions on the banking sector that require a degree of dominant ownership, (unlike) in Hong Kong.
"They (Singapore) have liberalised their banking sector to some extent and so we might be looking at some improvement in their score in the future years, but there's far more for them to do in that area."
Four out of the world's top 10 freest economies come from the Asia Pacific.
Hong Kong keeps its pole position, but its score falls by 3 percentage points, while Singapore pulls ahead by 2 points. Japan is in fifth place.
Hong Kong's decline in score was due to a pick-up in inflation, which resulted in less monetary freedom.
Mr Miller said: "The reason its score is down by a very small percentage this year is because the inflation rate has risen slightly. We use a 3-year rolling average; that rate went up, so the score went down.
"I don't think we can say what next year's index will be, but I'm sure Hong Kong will continue to be a very strong performer indeed."
Welcoming the report, Hong Kong's Financial Secretary John Tsang reaffirmed Hong Kong's commitment to act as a facilitator for businesses and said it will continue to provide a level-playing field. - CNA/ir
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