'Whatever gloss you put on it," said a very senior British official sadly as he sat amid the dowdy splendor of Hong Kong's Government House, "there is no getting away from the inherently unsavory nature of what we are having to do."

Outside his window, the stunning new Bank of China building, the local branch of China's state-owned national bank, cuts like a knife through Hong Kong's soaring, Manhattan-style skyline to intimidate all around it, casting a sinister, superior shadow over the old colonial headquarters. "There is nothing left to do," added the official grimly, "but hope that China will deliver on its promises to respect Hong Kong's political and economic freedoms."

At midnight on June 30 of this year, six million free, educated, and prosperous people will be handed over to the tender mercies of Communist China, ending 156 years of British colonial rule in the disposal of the last significant colony by an imperial power that once ruled a quarter of the globe—the biggest empire the world has ever seen. Hong Kong will wake on July 1 to find the red flag of China hoisted over Government House, the last British governor and his entourage already evacuated by the Royal Navy, replaced by a Beijing-appointed chief executive and a 5,000-strong garrison of the People's Liberation Army (P.L.A.); another 10,000 P.L.A. troops will be based just across the border.

The people of Hong Kong say they expect to be able to continue going about their business of getting and spending much as before, unimpeded by the totalitarian and Communist traditions of their new masters. But behind the bravado is a deep sense of foreboding: Hong Kongers recognize red flags as the signal that warns them of the imminent arrival of a severe typhoon.

It was not meant to end this way. When Margaret Thatcher, in the full flush of her military victory over Argentina in the Falkland Islands, visited Beijing in the fall of 1982 to begin talks on the future of Britain's last major colony, she harbored hopes that nothing much need change. Though Britain was bound by a late-19th-century treaty to return part of Hong Kong to China in 1997 (leaving the remaining bit over which Britain enjoyed sovereignty "in perpetuity" untenable on its own), she planned to offer the Chinese nominal sovereignty over the whole of Hong Kong in return for continued British administration. She was quickly disabused of such notions by China's paramount leader, Deng Xiaoping.

"We could walk in," Deng said, "and take Hong Kong later today if we wanted."

"Indeed, you could," replied the British prime minister, "and I could not stop you." It was a frank admission of Britain's weak negotiating position.

"But you would bring about Hong Kong's collapse," she continued. "The world would then see what followed a change from British to Chinese rule."

Deng was shrewd enough to realize that. He was anxious to inherit the vast wealth of Hong Kong intact rather than to see it destroyed in a heavy-handed takeover, and he wanted to send a signal to Taiwan that renegade regimes could rejoin the Chinese motherland without having to give up their distinctive characteristics.

Indeed, the "one country, two systems," which Deng proposed to Thatcher and which forms the basis of the 1984 Sino-British agreement on Hong Kong, had originally been devised by Beijing to apply to Taiwan. Even Thatcher described it as a "stroke of genius." It makes Hong Kong part of China but allows it to retain its capitalist ways as a supposedly self-governing "special administrative region" for the next 50 years.

"Put their hearts at ease," Deng had told Hong Kong's governor in the late 1970s when investors' concerns about what would happen after the British lease expired in 1997 were first raised with Beijing. Such soothing assurances encouraged some in the British administration to think that the Chinese might let 1997 come and go without anything happening—that the status quo would hold, to everybody's benefit. But they were fooling themselves.

"They always made it clear," says a senior British diplomat intimately involved in the negotiations, "that they would take Hong Kong back even if it had to be reduced to a burnt-out shell." There is no mystery why this should be so: regaining Hong Kong, whatever its condition, was the only way to avenge China's humiliation in the Opium Wars of the last century.

When British traders began selling opium from poppies grown in India to the Chinese 200 years ago, they did not see themselves as the forerunners of the Colombian drug cartel. Opium was held in high regard for its medicinal qualities, from reducing fevers to encouraging healing to deadening the pain of operations. It was known that it could also be used as what today would be called a recreational drug, but the British authorities were far more worried about the abuse of alcohol (opium was not banned in Britain until this century). In China, where smoking opium had been widespread for centuries, the government was more concerned about tobacco, the penalty for the sale of which was decapitation. The British concluded that opium was something they could offer the Chinese in exchange for their tea, which Britain had started to drink in huge quantities.

By the early 19th century, official Chinese opinion had hardened considerably against opium, while Britain, the workshop of the world, was more eager than ever to open up the huge Chinese market to all manner of British goods. It was even ready to ban the opium trade in return for wider access to the China market. But a series of misunderstandings led to war in 1839, in which the might of the Royal Navy prevailed. At 8:15 A.M. on January 26, 1841, the Union Jack was hoisted over the tiny island of Hong Kong, and, according to Frank Welsh's seminal A History of Hong Kong, Queen Victoria's health was drunk.

"We could walk in and take Hong Kong later today if we wanted," Chinese leader Deng told Margaret Thatcher.

Back in London, Lord Palmerston, the British foreign secretary, was furious. He denounced Charles Elliot, the British naval officer who had seized Hong Kong, for taking "a barren island with hardly a house upon it." He had previously made it clear that acquisition of territory was not a fundamental British war aim: what Britain wanted was a guarantee of free and safe access to China's markets. Palmerston withdrew Elliot and exiled him to be charge d'affaires to the Republic of Texas.

But Britain held on to Hong Kong—it became a secure base for British traders dealing with China. When the humiliated Chinese were forced to agree to its cession, they were amazed that that was all Britain was demanding. "Is that all?" asked one baffled Chinese negotiator of the Treaty of Nanking, which gave Britain sovereignty over Hong Kong. It wasn't, quite. After a second Opium War, the British seized the coastal tip of the Kowloon Peninsula, across the harbor from Hong Kong Island. Then, in 1898, with several imperialist powers picking at the edges of China, Britain secured a 99-year lease on 366 square miles of land adjacent to Kowloon, known as the New Territories. This last addition now accounts for more than 90 percent of Hong Kong's land area. Significantly, all of Hong Kong's water runs through the New Territories. Even more crucially, it is that lease which expires on June 30, necessitating the return of all of Hong Kong to China.

For many years Palmerston's harsh judgment seemed justified. Though many British "hongs" (or trading houses—the name Hong Kong means "fragrant harbor" and comes from a different Chinese word) prospered, Hong Kong remained something of a backwater. Its golden years did not begin until the Chinese revolution in the late 1940s, when the Cantonese of southern China, many of them well-established entrepreneurs, fled Communism and poured across the Hong Kong border. There was yet another massive exodus from Canton two decades later, during the madness of Mao's Cultural Revolution. The frugal, industrious newcomers transformed Hong Kong into one of the world's capitalist showcases.

Hong Kong is today regarded by the Washington-based Heritage Foundation as the world's purest free-market economy. Taxes are among the lowest in the world (income tax is no more than 15 percent), the government confines itself to providing only the essential public services (which it does efficiently, spending less than a fifth of Hong Kong's gross domestic product), and the currency (linked soundly to the dollar) is strong. Britain provided limited, mostly uncorrupt government and the rule of law; the Cantonese, the risktaking and the hard work. The result has been an economic miracle: a mere 6.3 million people have turned that barren rock into the eighth-largest trading economy in the world.

Hong Kong, after several decades of spectacular economic growth, enjoys one of the highest standards of living in the world, with full employment, a substantial budget surplus, and a per capita income higher than that of its colonial homeland and most other European countries. Infant-mortality and life-expectancy rates compare favorably with the best in the West. People have had full civil and religious freedoms, except the right to elect their own government. But since the vast majority have been going about their business without the state ever intruding, this has not been much of a sore point.

Hong Kongers recognize red flags as the signal that warns of the arrival of a severe typhoon.

Hong Kongers were hardly eager to return to the embrace of Mother China, but when it finally dawned on them that that was indeed to be their fate, they looked to Britain for protection: under British law, anybody born in Hong Kong was a British citizen with rights of residence in Britain. But before Britain began the negotiations with China which would eventually cede Hong Kong's sovereignty it reneged on its people's rights to British citizenship. A 1981 act gave full British nationality rights to the people of the Falklands and Gibraltar but excluded Hong Kongers, even though, legally, they had enjoyed the same status as the inhabitants of these two other British colonies. Politicians murmured darkly about the need to avoid being swamped by millions of yellow people, no matter how much their entrepreneurial zeal would have boosted the British economy.

To compound the Hong Kongers' sense of abandonment, no democratic structures were introduced into the colony, even though the handover to a totalitarian power was less than a decade away. Christopher Patten, the new (and last) governor, who arrived from London in 1992, belatedly tried to make good the democratic deficit. But this served only to infuriate the Chinese, who thought the condition in which Hong Kong would be returned was a done deal. The richest Hong Kongers decided to make the best of a bad situation—and deal directly with China themselves.

'You're looking at the beginning of the future of Hong Kong," says David Chu, motioning to the window, as we breakfasted in the American Club, 48 floors above Hong Kong. "The property and stock markets are already at record highs, but the best is yet to come. Business will be fantastic."

Below us the narrow, choppy channel between Hong Kong Island and Kowloon is covered with boats scudding back and forth in a frenzy of commercial activity. On our side of Victoria Harbour a huge building is rising from land reclaimed from the sea, the beginnings of an 85-floor tower which will be even taller than I. M. Pei's Bank of China; another huge development, on yet more reclaimed land, is taking shape directly opposite us in Kowloon.

"It's hardly the empty shell that the Western media were predicting we'd be reduced to as reunification with China neared," continues Chu, one of the new breed of self-made Hong Kong tycoons who now dominate this place. As he speaks, a huge dark cloud suddenly casts its gloom over the whole bay; the boats seem to cower in its presence. But there is no denying what Chu is saying: whatever uncertainties govern its fate, Hong Kong is approaching them in fine economic fettle.

Property prices, always the key to this small, overcrowded city-state's prosperity, are close to historic highs, despite the imminent prospect of a Communist landlord. Hong Kong's property magnates have started to invest a staggering $80 billion in new commercial and residential developments that will go up between now and the end of the decade—enough to buy several dozen Rockefeller Centers. Much of the building is being financed by Beijing investment companies.

Hong Kong's wealthy business community is already doing big business with China. Its companies employ over five million people on the Chinese mainland and account for the bulk of foreign investment in China, as manufacturing has moved to the mainland with its lower costs and Hong Kong has switched to a high-value, service economy. Business has made, in effect, a Faustian pact with the Beijing leadership: Leave us alone to continue making our billions and we won't complain if some freedoms are eroded—provided you don't go so far as to undermine business confidence with a total clampdown. Hong Kong's business community has not just been intimidated into silence; it has been enlisted into active support for China.

The China Club has replaced the Hong Kong Club, haunt of wealthy colonials, as the most exclusive club.

Chu, a flamboyant 52-year-old real-estate developer with impeccable English and a taste for danger, is so confident of Hong Kong's future that he even tore up his American passport. He has also put his money where his mouth is, sending almost seven pounds of gold to decorate the ceilings of his new mansion in Beijing with more than 1,000 gold-leaf dragons.

"China is like a suburb of Hong Kong to me," he explains. "I move freely between the two. I even have a farm in China."

His mode of transportation is sometimes unconventional. Not content with taking the road to Beijing on his HarleyDavidson, he has also made the journey by motorized paraglider, setting the world record for height, he claims, in the process. Even that 10-day adventure elicited no fear from a man who once shot 50 kilometers of Chinese rapids in only a wet suit ("I ended up a little black-and-blue," he admits, "especially since the journey involved 2,000 meters of vertical drop").

It is comforting to other Hong Kong investors that such a freewheeling capitalist risktaker should feel at home with the Communist cadres of Beijing. "I have put all my eggs in one basket—the best basket," says Chu, predicting that Hong Kong will remain a key player in the global economy, reinforcing China's economic miracle in the process. He is far from alone in such beliefs.

David Tang, an Anglicized Hong Kong entrepreneur who is distinguished by the sartorial style of the Orient and a cut-glass English accent that makes the Queen sound common, also has few doubts about the future: "There is no way China is going to run this place worse than the last five years of British rule," he says confidently. "The world is waiting to judge China compared with Britain. Too much Chinese pride is on the line for it to fail. They'll succeed even if they have to throw money at the property market to keep the economy buoyant—and they'll force the local tycoons to do the same."

Tang is the proud owner of the China Club (entrance fee: $20,000), a magnificent suite of rooms atop the old Bank of China building in downtown Hong Kong done in the opulent Art Deco style of Shanghai in the 1930s and adorned with his own vast collection of Chinese paintings and photographs. It has replaced the Hong Kong Club, haunt of wealthy white colonials, as the most exclusive club in the city-state—a social switch with political and ethnic significance. Last year he opened another China Club, in Beijing, flying in a host of celebrities, from the Duchess of York to Kevin Costner, for the first night.

Striding around the China Club's rooftop terrace, Tang predicts, "China's state enterprises will want to garage their money in Hong Kong and channel it through here to the wider world. It will be China's bridge to the global economy just as the British, Americans, and the rest of the West have used it as a gateway to trade with China."

China is already the biggest investor in Hong Kong, having overtaken first the British, then the Americans and Japanese over the past decade. If Hong Kong goes down the drain, much Chinese treasure will go with it—a thought which keeps the city-state's business folk optimistic.

"Mainland China is our best guarantee of keeping Hong Kong an extreme laissez-faire society," argues Carson Wen, a young, articulate spokesman for Hong Kong's pro-Beijing business interests, over breakfast at the China Club. "The democrats here want more social democracy, including a bigger welfare state and pro-labor rules and regulations which will erode our competitive edge. The Chinese will stop any moves to welfarism."

I struggle to understand the concept of the world's largest Marxist state as the guardian of the world's purest free-market economy. But Wen, who describes himself as a "pro-China Tory," is serious: "Very little is left of Communist ideology in Beijing," he maintains. The Chinese have already warned the colonial government not to spend its huge budget surplus on extra welfare payments.

"There is an agreement in place between Hong Kong's very rich and the Communist elite in Beijing," confirms Willy Lam, a correspondent specializing in China for Hong Kong's English-language South China Morning Post. "Together they will defend the Hong Kong dollar and keep the markets strong after June 30."

According to one informed observer, Beijing has already worked out a detailed, secret plan with Hong Kong's business leaders to rescue confidence should it collapse after the handover. A huge fighting fund of $160 billion has been amassed should any George Soros-type trader decide to speculate on the collapse of Hong Kong's dollar.

"There is an agreement in place between Hong Kong's rich and the elite in Beijing to defend the Hong Kong dollar."

There is plenty of other evidence of an unlikely alliance between Hong Kong's billionaires and its Communist bosses waiting in the wings. Tung Chee-hwa, the man Beijing has handpicked to replace the outgoing British governor as Hong Kong's chief executive, is a conservative business grandee who has been indebted to China since it bailed out his family's troubled shipping empire a decade ago. China says he has "solid and patriotic credentials."

A large digital clock on Tiananmen Square in the heart of Beijing counts down the seconds until midnight on June 30. Another ticks away the time on the border with Hong Kong just across the muddy Shenzhen River. The Chinese can hardly wait—not just because of national pride, though that is certainly involved, but because there are untold riches in which to demand a share. When Hong Kong's 6.3 million join with the 1.2 billion of the mainland they will account for an amazing 18 percent of China's gross national product. The Communist cadres are bound to insist on a sizable slice of the action.

Carson Wen is right to say that Marxism no longer holds sway in Beijing. These days Communism in China is whatever its rulers say it is. The corruption and cronyism of China, not its Communist ideology, are now the real threats to Hong Kong capitalism.

Chinese Communism has evolved into state capitalism under the rigid control of the Communist Party elite. Beijing has been depoliticized: power struggles within the ruling elite reflect various vested interests rather than different ideological perspectives—and they all have a common interest in not rocking the boat too hard.

"The Chinese Communist Party is no longer about the expropriation of private property or the redistribution of wealth," says Jesse Wong, a shrewd Hong Kong-based observer of events for the Asian Wall Street Journal. "It is only out to stay in power."

That should come as no surprise: with power has come great wealth for the families whose fathers led the Chinese Communist revolution 50 years ago. Chinese industry is now run by their offspring—the "Red Princelings." China's ruling elite has gone from Revolutionary Marxist to New Aristocracy in only one generation.

The best picture of how modern China operates is given by Bruce Bueno de Mesquita, David Newman, and Alvin Rabushka in Red Flag over Hong Kong (published by Chatham House last year), a gloomy analysis of the city-state's future:

Imagine that IBM was a subsidiary of the U.S. Defense Department, that Exxon was controlled by the Commerce Department, R.J. Reynolds by the Department of Health, Education and Welfare, McDonnell Douglas by the U.S. Army, and Bath shipyard by the U.S. Navy. Imagine that the City of New York owned Consolidated Edison . . . and that Chicago owned hotels, restaurants, and pager services. Finally, try to imagine that the U.S. Coast Guard operated brothels and prostitution rings.

But even this analogy is not the full story. . . . We would have to place the sons, daughters, grandsons, and granddaughters of leading political and military families in charge of these firms. David Eisenhower would run Exxon, Amy Carter would be the chief executive of IBM, and Maureen Reagan would manage Consolidated Edison.

In such a system, connections (guanxi in Chinese) are obviously paramount and corruption is rife. Last October the Asian Wall Street Journal published a comparative index of corruption in 53 countries, with a scale ranging from 0 (totally corrupt) to 10 (totally clean). New Zealand came out as the cleanest country in the world, with a corruption rating of 9.43, Nigeria as the most corrupt, with a rating of 0.69. Hong Kong was among the cleanest, in 18th place with a 7.01 rating, thanks to a long-established rule of law and a vigorous anti-corruption bureau. But China was in 49th place—5th from the bottom—with a rating of a mere 2.43. Only Bangladesh, Kenya, Pakistan, and Nigeria scored worse.

It is probably only a matter of time before all of Hong Kong's strategic industries—airlines, telecommunications, utilities, and even banking—are under some sort of mainland control. It will be then that Beijing will also start to impinge on the business interests of the Hong Kong Chinese.

The P.L.A. is less an army (its fighting capability is now a shambles) than a massive military-industrial complex that controls more than 20,000 companies, including a dozen major conglomerates. It sees Hong Kong not just as a source of future capital and expansion into new markets but as a place in which to invest its illegal and undeclared profits and as a base from which it can move funds offshore. Since the P.L.A. is a major player in smuggling, piracy, extortion, and even kidnapping, there is clearly much scope for murky dealings to sully Hong Kong's reputation.

Martin Lee, the leader of the Democratic Party, has put himself on a strict diet to prepare for a Chinese jail.

"China will need to insulate Hong Kong from its corruption and cronyism," says Governor Patten. Even the China boosters in the Hong Kong business community concede that is a tall order. "Our biggest fear is corruption," admits Carson Wen, "which has grown in China as a result of centralized, state-sponsored growth. It is already the chief reason for the unpopularity of the Communist Party within China." The Asian Wall Street Journal's Jesse Wong agrees: "The chaos, corruption, and lawlessness of China are Hong Kong's real worries after 1997."

Martin Lee, the leader of the Democratic Party, the largest group in Hong Kong's recently elected legislative council, introduces himself by telling you that he has put himself on a strict diet, the better to prepare himself for a Chinese jail. He drinks only water—not even coffee or tea.

"There is no question that free speech will be the first casualty," says this slight, elegant, partly British-educated lawyer. "China will control this place in every way. The mood here is one of helplessness."

Beijing has already pledged to abolish the legislative council the moment it takes over and to gut the colony's liberal Bill of Rights. At the end of last year it established a 60-person puppet assembly in southern China, known as "the provisional legislature," designed to replace the current elected one. Around 400 pro-Beijing Hong Kong billionaires and political activists were bused across the border to Shenzhen to nominate its members in a pretense of democracy which Governor Patten dismissed as "a bizarre farce. The average tennis club runs its affairs in a more dignified way."

"Beijing's rubber-stamp provisional legislature," says Lee, "can be relied on to pass laws that strip Hong Kong people of the liberties we so cherish."

Emily Lau, an attractive, outspoken ally of Lee's in Hong Kong's prodemocracy movement, agrees: "The Hong Kong government [after June 30] can be relied upon to do the repression on China's behalf. It'll do as Beijing tells it." She rushes off to a press conference to denounce China's latest interference in Hong Kong affairs. "Just watch," she says. "None of the journalists will ask questions."

Hong Kong's David Chu has sent seven pounds of gold to Beijing to decorate his new mansion there.

She's right. A posse of young Hong Kong journalists, looking as if they should still be in journalism school, troop in to hear her. She reads a prepared statement. The journalists listen dutifully, then troop out again. Lau shrugs her shoulders and smiles at me: "The signs are everywhere," she says, "that the press is already censoring itself."

The British editor of the South China Morning Post, Jonathan Fenby, concedes that newspapers are being more careful not to offend the Chinese. "We are being encouraged not to describe the events in Tiananmen Square as a 'massacre' or a 'bloodbath,' " he says. " 'The incident' is a more acceptable description, or even just 'June 4.'" His predecessor had already decided to kill off the paper's popular "Lily Wong" daily cartoon strip, which regularly ridiculed Communist officials, purportedly for fear of offending Beijing.

The Hong Kong "ladies who lunch" did not seem to have the handover much in mind when they crowded into the top floor of the China Club, draped in their designer finery, to see the latest lingerie from Europe. As the models strutted down the runway in skimpy underwear, the air was regularly punctuated with the sound of ringing mobile phones. Almost everybody in Hong Kong has one, and they seem to spend most of their lives talking on them.

The women in the audience, stars of Hong Kong's vibrant social scene, had plenty to talk about: dresses to be fitted, lunches to arrange, charity balls to organize. They are the wives of Hong Kong's new rich: elegant, sophisticated, cosmopolitan. The city-state long ago ceased being Asia's bargain basement; prices in the swankiest shops can be double what they are on New York's Fifth Avenue— but there are plenty of wealthy locals who can afford to pay them.

Many of them fled Hong Kong in the aftermath of Tiananmen Square. They have returned with foreign passports in their safes and safe havens arranged in Canada, America, or Australia. "Being a refugee community in origin," says Governor Patten, "they've naturally taken out insurance against the worst happening." The wealthiest Hong Kongers have already shipped abroad a substantial part of their fortunes, from cash to antiques, just in case the jeremiads are right.

The reunion with China has whetted an appetite for "China chic": David Tang's Shanghai Tang store in central Hong Kong does a brisk business in smart Chinese-style clothes and accessories. He has plans to open similar stores in major Western cities. The young expatriates, mainly British and American, who gathered late last year in Macao, an hour from Hong Kong by jetfoil, for the annual, all-night Bela Vista Ball, one of the highlights of the expatriate social calendar, know that the future of Hong Kong does not belong to them. There was even talk, as they frolicked decadently through the night in an imposing old Portuguese colonial mansion, that this might be their last such ball.

This seemed unnecessarily gloomy. They did not owe their well-paid jobs in the financial sector to colonial privilege: their work is too open to international competition for that. But there was a sense that the pinnacles of the business community were now firmly in the grip of the Hong Kong Chinese, who were more than competent enough to fill the top posts, from which expatriates would increasingly be excluded.

The night before, I had attended another black-tie event, which is now more typical of Hong Kong's social life: one of the interminable charity balls that the city-state's Cantonese business elite regularly frequent. This one filled the huge ballroom of a Kowloon hotel, had the late Shah of Iran's son, Reza, as the guest of honor, and involved the auctioning of various works of art. The rules of the auction were so complicated that the master of ceremonies had to use a computer display projected onto a large screen to explain them. He did so in English and Chinese. "I suppose not every Cantonese businessman speaks English," I remarked to my generous host. "Most do," he replied, "but tonight we're raising money for kids in mainland China. He's speaking Mandarin for the various dignitaries from over the border." They were escorted to the stage by shapely females with titles like Miss Hong Kong and Miss Beautiful Body. Clearly, the Chinese have already arrived and are being feted.

There is no historical precedent for what is about to happen," says Jim Rohwer, editor of Asia Inc magazine, which is based in Hong Kong. "One of the world's most sophisticated cities is going to be taken over by a primitive government."

When confronted by a people used to the ways of a free society, China's ruthless ruling elite is likely to act with its customary brutality: it is the way it has been bred to behave. "China by her very nature," says Jimmy McGregor, a business consultant and veteran China hand based in Hong Kong, "will find it necessary to intervene and interfere in Hong Kong."

The colony is already riddled with Chinese agents and gangsters who know who Beijing's enemies are.

There is, as yet, no sign that increased prosperity is making China any more liberal. Indeed, public discontent with the upheaval caused to settled ways by fast economic growth has encouraged Beijing to be even more repressive. "With the latest round of arrests," said Robin Munro, the director of the Hong Kong office of Human Rights Watch, last October, "China has put the final nail into the coffin of the democracy movement. I cannot think of any dissident of significance who is still at large in China anymore."

One who got away was Wang Xizhe, who had already spent 12 years in a Chinese prison for supporting democracy. He fled to America last fall after being smuggled out of China via Hong Kong. Beijing made it clear that Hong Kong's days as a sanctuary for dissidents were numbered: "Hong Kong will become an international financial, economic, and trade center. It will not become a center for other things," said a Chinese official bluntly.

There are various subtle ways, short of rounding up troublesome democrats and throwing them in jail, that China can deal with dissidents in Hong Kong. Organized crime in the form of the Triad gangs, for example, is well represented in Hong Kong and has strong political and business ties to the mainland. China's minister of public security recently described the Triads as "patriotic" Chinese, which sent a shiver down the spines of many Hong Kong democrats. Several security experts confirmed to me that Beijing would not be above authorizing the Triads to lean on troublemakers to intimidate them into abandoning further democratic activities. The colony is already riddled with Chinese agents who know who Beijing's enemies are.

But gangsters and spies cannot cow a whole population, and Beijing's greatest fear is large-scale protests from a people used to demonstrating whenever they want to. The "incident" in Tiananmen Square on June 4, 1989, shocked Hong Kong to the core. A million people poured onto the colony's streets to protest the Chinese government's savage repression of its own people. Since then a vigil has been held every June in Victoria Park. Last year 40,000 Hong Kongers from all walks of life lit and raised candles to commemorate the dead of Tiananmen.

This year could be the last such ceremony. Last October, Qian Qichen, the Chinese foreign minister, told the Asian Wall Street Journal that future commemorations of Tiananmen Square would be banned, along with "personal attacks on the Chinese leaders." Various Beijing bosses have made it clear that public expressions of support in Hong Kong for an independent Tibet or Taiwan will also not be tolerated.

Confidence in Hong Kong is most likely to be shattered by an escalation of incidents that get out of hand. Any number of causes could provoke social unrest, from attempts to memorialize Tiananmen to the celebration of Taiwan's National Day in October to attacks on visiting Chinese dignitaries. When Lu Ping, Beijing's senior man for Hong Kong affairs, paid a visit last April, he was greeted by jeering crowds at the airport and by demonstrators who burned tires outside his hotel and disrupted his meetings.

With Britain banished from the region, it is the United States which will be forced to respond should China renege on its promise to respect Hong Kong's freedoms. "America becomes a lot more important after we've gone," says Governor Patten. "In geopolitical terms," adds Jim Rohwer, "the United States is the only country that counts. The anti-China lobby [an unlikely mixture of liberal Democrats and anti-Communist Republican hawks] is watching and waiting."

The State Department has been mandated by Congress to produce regular studies on Hong Kong since 1992. These reports will take on a heightened significance after June 30—not just because the U.S. has $13 billion worth of investments and 37,000 citizens in the colony. Any excessively brutal Chinese behavior in Hong Kong is bound to affect Beijing's relations with Washington and to cause a split between those Americans who want to continue trading with the world's most populous nation and those who think America should stand up strongly for human rights. "The potential impact of an unsuccessful transition," Winston Lord, an assistant secretary of state, warned China in testimony to the U.S. Senate last July, "should not be underestimated."

China's future—above all its future relationship with America and Taiwan— depends largely on how relations between Beijing and Hong Kong develop. "It is the litmus test for China," says Governor Patten, "and it makes every problem worse if China gets it wrong." Not for the first time in the wake of a British withdrawal—one thinks of the Persian Gulf, Palestine, or Grenada—has the United States inherited a new and onerous international responsibility.