By Keith B. Richburg
Washington Post Foreign Service
Thursday, July 2, 1998; Page A23

HONG KONG, July 1—There were no fireworks and no floats, no all-night parties and no kitschy souvenirs. And this time, there were no homing pigeons symbolically finding their way back to their motherland.

Instead, a more subdued Hong Kong marked the first anniversary of its return to China with a low-key series of events -- and with sober warnings from Beijing and Hong Kong leaders that tough economic times lie ahead.

"The turmoil is not over," said Chinese President Jiang Zemin, speaking today before a gala variety show at Hong Kong's coliseum. "Hong Kong's economic difficulties will continue for a while."

But Jiang promised that Beijing would assist the territory, using China's large trade surplus, and he repeated a vow that his government will not devalue the Chinese currency, the renminbi, also known as the yuan.

Jiang also praised Hong Kong's year-old autonomy formula -- known here as "one country, two systems" -- and said its success showed that it could also be used as a model for Taiwan's eventual reunification with the mainland. He called the formula "an example for Macau's smooth return to the motherland and for the final settlement of the Taiwan question."

Macau, a Portuguese-run enclave on the Chinese coast west of here, reverts to Chinese control next year under an autonomy formula similar to Hong Kong's. But officials in Taiwan repeatedly have rejected any attempt to apply the same model there saying there can be no reunification until the mainland becomes more democratic.

Jiang's promise to help Hong Kong revive its sagging economy illustrated a remarkable turnaround. Before Hong Kong's transfer from British to Chinese control, analysts predicted that the territory's vibrant and sophisticated economy would help prop up the fledgling market system of the Communist-run motherland. But now Hong Kong is facing its first recession in more than a decade and is counting on fast-growing China to keep its currency stable, to use its foreign reserves as a backup in case of a speculative attack on the Hong Kong dollar, and to help save the enclave's shrinking tourist industry by allowing more mainland visitors to come here.

Tung Chee-hwa, the Beijing-appointed chief executive of Hong Kong, acknowledged the reversal of fortunes today. Hong Kong, Tung said, will "benefit a great deal from our motherland's rapid development and prosperity."

When Jiang last spoke in Hong Kong, one year ago, his visit was part of an extravagant, four-day series of reunification events marked by parades, banquets, performances, the world's largest fireworks display and the release of 10,000 Chinese homing pigeons.

Officially, the mood was triumphant, even though there were deep misgivings among ordinary people about whether their lives would change -- and their freedoms be curtailed -- after the territory came under the control of one of the world's last remaining Communist states.

But since the transfer, those fears have been replaced by concerns about an economic downturn that promises only to get worse. The stock market has lost half its value, and a pre-unification real estate boom has burst, sending residential and commercial property prices plummeting 40 percent since their mid-1997 highs. Unemployment this year has topped 4 percent, a 15-year high, and officials say the jobless rate is growing.

The economic worries forced the government to curtail plans for a larger celebration to mark Hong Kong's first anniversary under Chinese rule. And, far from last year's triumphant talk, the speeches today were dominated by financial worries.

"As we were marching toward our lofty goal, the Asian financial turmoil struck Hong Kong out of the blue," Tung said. The chief executive, whose administration has been criticized for moving too slowly to address the mounting economic ills, said, "Hong Kong has been dealt a severe blow, and our people have suffered a lot."

Hong Kong's unexpected economic slide has masked what for many has been the most surprising, and positive, aspect of the last year of Chinese rule -- that is, the fact that China has largely kept a hands-off policy on the territory's internal affairs and that, on the surface, much here remains unchanged.

There has been no attempt to rename streets or subway stations, leaving untouched such colonial anachronisms as "Queen's Road" and "Prince Edward Station." The Chinese army, which blitzed across the border into Hong Kong a year ago in trucks and armored vehicles, has remained largely invisible to the public.

For the first time in Hong Kong's history, all the principal cabinet secretaries are Chinese. But one level beneath in the civil service, about one-fifth to one-quarter of department heads and deputy-heads are Caucasians -- British or Australian holdovers from the last colonial regime. Expatriates still hold top jobs in such departments as tourism, the environment, information services and police.

Beijing abolished the territory's elected legislature and replaced it with an appointed one, which instituted fresh restrictions on the right to form organizations and stage demonstrations. A new law outlawing subversion is still being drafted.

On the other hand, elections were held in May, as promised, for a new elected legislature that will replace the appointed one -- and democracy advocates ousted from the chamber a year ago have regained their seats. Although new laws to control public demonstrations are on the books, they have been enforced rarely, and small-scale protests now seem an almost daily occurrence.

Even longtime critics of China have acknowledged being pleasantly surprised. "When the Chinese government said they would roll back some of our freedoms, they did so, but not to the full extent," said Martin Lee, chairman of Hong Kong's Democratic Party. "It could have been worse."

Lee credits the outspokenness of politicians like himself and the vigilance of the international community and the foreign press with thwarting some of Beijing's most regressive designs for Hong Kong.