Amid the skyscrapers and other glittery monuments to this capitalist dynamo lies a squalid warren of tenements that looks like a fossil from pre-modern China.

The place is called the Walled City, and, in fact, it has been largely forgotten since the Qing Dynasty leased the rest of Hong Kong to Great Britain in 1898. By a historical quirk, the tiny area of 6.5 acres has effectively remained a political no man's land, left to degenerate into a world of such filth and crime that one of its main streets is aptly named Dragon's Saliva.

Although the community's high walls were razed long ago, it has been politically and economically walled off from this fast-modernizing territory for almost a century.

As the wheel of history comes full circle, however, the little city within a city that everyone chose to ignore has suddenly become part of a high-stakes political contest involving the future of all Hong Kong.

The contest began last year when the Communist regime in Peking announced plans to recover sovereignty over Hong Kong after the British lease expires in 1997. Chinese officials have spoken of creating a "special administrative region" with "Hong Kong people administering Hong Kong" while keeping the current socioeconomic system intact.

London reportedly is ready to drop its claim to sovereignty, but it hopes to retain some role in administering the prosperous colony on China's southeastern coast.

The Walled City began figuring into the issue last month. Xu Jiatun, Peking's new senior representative in Hong Kong, visited the community's 30,000 people as one of his first public outings.

Xu's motives were obvious to political observers here. He went to reassert Chinese domain over the Walled City and to cite it as an example of the kind of self-rule Peking is planning for the rest of Hong Kong's 5.5 million residents, almost all of Chinese descent.

Indeed, Xu was quoted as saying he was very pleased with the management of the area by the Kaifong Welfare Advancement Association, a locally selected body.

Pro-Chinese observers were heartened by the visit, saying Xu displayed real concern for the Walled City.

But supporters of British administration were puzzled as to why Xu chose one of Hong Kong's most blighted sections as a model of self-government. They assumed he was misled by his advisers.

"At the end of the day, Xu must have realized the whole thing backfired," a political source said. "He must not have known what he was getting into. Most people feel if the Walled City is a sight of the future, they don't want any part of it."

The Walled City became known as Hong Kong's neglected stepchild because of an unresolved wrinkle in the 1898 lease agreement. London originally agreed to let Chinese mandarins continue to run the then-enclosed exclave except when the security of the rest of the colony was in jeopardy.

London revoked the right a year later, but China has persistently claimed sovereignty over the years. Nevertheless, no Chinese representative has lived in the Walled City for decades.

The British, careful to avoid a clash with Peking, have likewise kept hands off the area.

As result, the Walled City has been left to its own devices. Until Hong Kong police began making cursory patrols in recent times, it was a center of prostitution, opium dens and gambling. Organized crime groups known as triads still are said to operate in the all but lawless community, and it reportedly is a haven for drug dealers, illegal immigrants and unlicensed dentists.

Located on the Kowloon peninsula near the busy Hong Kong airport, the Walled City looks like a scene from Dante's "Inferno." Its dank, garbage-clogged passageways form a forbidding labyrinth visited by few outsiders.

Buildings are pressed together so closely that neighbors can shake hands through their bedroom windows. Only one space between the crumbling structures is wide enough to admit sunshine.

Residents face daily safety and health dangers from rats, open sewers, dangling electricity wires and the steady drip of water from overhead pipes illegally connected to mains outside the community. There is no public water supply. There are no public schools. Fire trucks would be hard pressed to enter the area in an emergency.

"Environmentally, it is a cancer," said Victor Ng, assistant officer of the Hong Kong district encompassing the Walled City.

Ng said that despite jurisdictional fuzziness the Hong Kong government now sends in police to patrol the Walled City and trucks to pick up trash. There are plans to demolish a surrounding slum of squatter huts so water lines can be extended.

"We look at these people as part of us," Ng said. "We feel an obligation to help them."

To the inhabitants of the Walled City, political identity is not as important as the pressing needs of daily life.

Some residents regard the place as part of China. They hoist Chinese flags on national day and welcome the Communist return in 1997.

Twenty years ago, those people appealed to Peking to stop British plans to tear down the Walled City. Communist officials protested, and Hong Kong's administrators backed off to prevent a showdown.