The view of Hong Kong from Victoria's Peak. (AP)

In the early part of the 20th Century, Hong Kong commerce grew quickly as new industries were founded and trade increased. Pumping new life into the colony were thousands of refugees from China, who fled after the establishment of the Chinese Republic in 1912 and the subsequent Japanese invasion of Manchuria in 1932. (Although thousands fled Hong Kong after the British surrender to the Japanese in 1941, many returned following the resumption of British rule in 1945).

In the period 1948-49, Hong Kong was again flooded by refugees, this time hundreds of thousands of Chinese fleeing the takeover of the Mainland by the Communists. During the 1950s and 1960s, the colony used this abundance of cheap labor to develop a light manufacturing industry producing textiles, electronics, and other export products. At the same time, Hong Kong's liberal tax policies attracted foreign investment, further spurring the island's growth.

By the late 1970s, Hong Kong had become a dynamic, international city-state and one of the centers for commerce in Asia. Discussions between China and Britain about the future of Hong Kong and the New Territories lease began in earnest during this period.

"July 1, 1997, will go down in the annals of history as a day that merits eternal memory." – Chinese President Jiang Zemin on the day of the handover.

Despite British reservations about Chinese rule, the two countries signed the Joint Declaration in 1984, outlining the process by which Hong Kong would be handed over to the Chinese in 1997. Under the agreement, China pledged to establish a "one country, two systems" approach, maintaining capitalism and the Hong Kong lifestyle for 50 years after the hand over.

Hong Kong democracy advocates, however, remained skeptical of China's intentions, particularly after People's Liberation Army tanks rolled into Tiananmen Square in June 1989, crushing a student-led democracy demonstration. Later in 1990, China adopted the Basic Law, a legal document that outlined the structure of Hong Kong's "post-hand over" government. Among other things, the law defined the selection of a chief executive by China's Central People's Government to run Hong Kong after 1997.

Before its departure, Britain did try to introduce democracy to Hong Kong. In 1992, with the arrival of new governor Chris Patten, British officials attempted to introduce moderate democratic reforms in the territory. In 1995, elections were held for 20 of the 60 seats in the Legislative Council. Chinese officials would eventually disband this legislature, setting up its own lawmaking body in 1997.

The hand over of Hong Kong on July 1, 1997 marked the end of 156 years of British rule and ushered in a new era, one filled with its share of difficulties for chief executive, Tung Chee-hwa. In late 1997, Hong Kong suffered a wave of illnesses due to a strain of avian flu. Eventually six people died and critics blamed the deaths on inaction by Tung's government.

Hong Kong also has suffered problems resulting from the economic crisis in Asia. In particular, currency devaluations across Asia have hurt Hong Kong's tourist industry, making it more expensive for Asian visitors to see Kowloon and the island.

Finance companies also have felt the squeeze, with fewer overseas investors wanting to put money into Asia. Layoffs have soared. In January 1998, Hong Kong's premier investment bank, Peregrine Investments Holdings Ltd., filed for liquidation, eliminating the jobs of 1,700 workers.

For the three months that ended in February 1998, the jobless rate in Hong Kong was 2.9 percent, up 0.4 percent from the previous reporting period. For the rest of 1998, analysts expect Hong Kong's unemployment rate to worsen, perhaps increasing to 6 or 7 percent.

Overall, Hong Kong, with its large foreign currency reserves, has been able to fend off speculation and keep its currency pegged to the U.S. dollar. However, the price has been high interest rates, which will likely keep the brakes on the economy in 1998.

In May 1998, voters turned out in record numbers for Hong Kong's first elections under Chinese rule – the first multi-party balloting ever in a region ruled by China's Communists. Critics of the Mainland won all of the 20 seats up for election. But a pro-Beijing business and professional elite will control most of Hong Kong's 60-seat legislature.

– Tim Ito, washingtonpost.com staffer