BY JOHANNA MCGEARY

For The First Time Britain Is Giving A Colony To A Communist State. The People Of Hong Kong Are Both Proud And Anxious

No one has quite done this before. Oh, yes, the British are long practiced in the solemn rites of lowering the imperial flag. For the 68th time this century, the Union Jack will slide permanently down a colonial flagpole, amid skirling Black Watch bagpipes, phalanxes of Gurkha soldiers and the measured paces of the Prince of Wales. But for all its high-toned honorability, the midnight ceremony on June 30 handing Hong Kong over to the People's Republic of China leaves the West feeling guilty, ignoble and very anxious. In those 67 prior cases, the world's greatest modern empire was setting free its territories to be democratic, at least in theory. What the West cannot quite stomach this time is that the stunningly prosperous enclave of Hong Kong, home to more than 6 million Chinese, most of whom fled or whose parents fled the mainland since the 1940s red revolution, is being given into communist hands. This is the era of democracy; we are supposed to have won the ideological war. So how come Hong Kong is being voluntarily handed back to the devil?

Look at it, for just a minute, the other way round. China recently published an "Atlas of Shame" cataloging its abasements at the hands of colonial powers over the past 155 years. First on the list: Britain, abetted by American merchants in 1840, turned its battleships and guns on Canton in order to ram opium down Chinese throats and open China to foreign exploitation. The humiliating siege ended when the Emperor capitulated and ceded Hong Kong Island to Britain.

At one minute after midnight on July 1, as the red-and-yellow flag of the People's Republic rises in the glare of artificial rockets, a proud nation will wipe away the stain of shame. President Jiang Zemin himself will preside as the motherland reclaims a piece of itself, instantly replacing the councils and crown symbols of British rule with the new authority of the Hong Kong Special Administrative Region. The Chinese feel that a historic wrong has been righted. It showed in the faces of the elderly pensioners who gathered a few weeks ago in the mainland city of Shenyang for their own humble handover ceremony. The Old People's Singing Group of Xinghur Park caroled their joy at Hong Kong's return: "100 years is a long time/But now Hong Kong is coming home."

If only it were that simple. The people of Hong Kong embrace neither of these extremes. They share pride in the reunification of China, and they harbor some misgivings about their new landlords, but they're ready to give their new system a chance. The awkward title of Special Administrative Region, HKSAR as it will be known, signals just how hard it will be to implement Deng Xiaoping's promise of "one country, two systems" with a "high degree of autonomy." At issue for Chinese on both sides of the new internal border is not only whether Hong Kong's system of advanced capitalism under the rule of law can be grafted onto the stunted system of Chinese socialism, but how, over the long term, the motherland and the former colony cope with the new realities. For the rest of the world, only beginning to come to terms with the prospect of China as a 21st century superpower, Beijing's management of Hong Kong will serve as the litmus test of its ability to operate within the constraints of the community of modern industrialized nations.

No matter what the pundits, politicians and experts say, everyone is only guessing about how this bold experiment will fare. All the opinions boil down to basic attitudes: you're either an optimist or a pessimist. Optimists start from the premise that it is so much in Beijing's interest to make Hong Kong work that it is bound to keep its promises. As Frank Ching, senior editor and columnist for the Far Eastern Economic Review, writes, "China did not spend two years negotiating the Joint Declaration, five years drafting the Basic Law...with the idea that it would tear them up on July 1." Optimists are confident that Hong Kong can remain a fair and open place to live and work because China needs Hong Kong's money and expertise to speed its own modernization. "The reason we have enjoyed autonomy for the past 50 years was not because the British were here but because China wanted it," says David Chu, a pro-Beijing real estate tycoon who sits in both the outgoing and incoming legislatures. "If that is the case, why should China want to take away our autonomy in the next 50 years?"

Pessimists say don't believe it. The liberty-loving democrats of Hong Kong are doomed to fall victim to China's power-mad communists. Even if Beijing's intentions were good--and they're not--its authoritarian habits and dictatorial rule will not tolerate Hong Kong's freedoms for long. Hong Kong's leading democrat, Martin Lee, predicts that a free press, rule of law, the right of assembly and of political demonstrations will disappear if the people of Hong Kong and the international community fail to fight Beijing for them. Tiananmen was the "real face" of the communists, says Democratic Party legislator Szeto Wah, a 66-year-old veteran opponent of Beijing, "and I know they will never allow any challenge to their authority. If China itself does not become democratic, there is little hope for Hong Kong."

So far, the transition has been amazingly smooth. Throughout the onerous negotiations, despite the revulsion in 1989 over the brutal bloodshed in Tiananmen Square, Hong Kong has grown steadily more prosperous. In a city whose business has always been business, the stock-market surge, real estate boom and expansive corporate behavior point to a bullish future. The place feels surprisingly relaxed. Public confidence in the new leadership is running high: C.H. Tung's favorable rating was 59%, according to a TIME/CNN poll by Yankelovich Partners Inc. While an estimated 387,000 citizens made a preliminary negative bet on the outcome and emigrated over the past few years, many have been coming home as their confidence returns.

Even China's harshest critics doubt that Beijing would deliberately destroy Hong Kong, and most Hong Kong people expect life to go on much as before. "We'll do fine," says Francis Zimmern, patriarch of one of the colony's oldest families and former chairman of the Hong Kong Stock Exchange, as he lunches at the old-money Hong Kong Club. "In business I've dealt with China over 50 years, and I've never got a bad check. They've never gone back on an agreement yet."

Many measure Hong Kong's prospects in terms of business. A lot of taipans feel the same way as David Li, chief executive of the Bank of East Asia. "I'm very confident about the handover," he says, because it will speed the integration of two economies and solidify Hong Kong's place as the business and financial center of a superpower state. Across the harbor in the dense tenements of Mong Kok, Bill Chak Hin-Fai, 34, is not worried either. "I'm doing things that benefit society under any government," says this teacher who moonlights at his own CD recording studio. "So it doesn't matter which government." Au Ming-gwan doubts his secondhand-motorbike business will suffer: "No matter what happens, people will still need transport." Other Hong Kong citizens rely on the enclave's famous resilience to see them through. Says modern-art dealer Johnson Chang as he sips a punch at the chic China Club: "I think this is just another one of those Hong Kong trials we periodically have to undergo. Either the whole thing produces no adverse effect or everything hits the roof. But Hong Kong could handle that. The more turmoil, the more chances for individuals to find their way to the top." In his ramshackle, illegal hut atop a crumbling building in Kowloon, occasional laborer Lee Man-Ko, 52, the father of six children, two of whom still live on the mainland, shrugs his shoulders wearily. He has just returned from 10 hours of hauling rubble from a building site for which he earned U.S.$52, and all he cares about is whether he will work again tomorrow. "As long as I can work, I'm content," he says. "It's like the globe turning in another direction, and we turn with it. If things change, we will change with things."

Such sanguine sentiments may shock Westerners who are fixated on Hong Kong's politics, but the feeling is widespread in the enclave. Solving the city's desperate housing shortage and developing welfare services for the elderly are far more immediate tests of the new government's credibility in the mind of most citizens. "They are the bread-and-butter issues that will make people like C.H. Tung," says Allen Lee, a pro-China businessman and political ally of the new Chief Executive named by Beijing. But even Lee acknowledges that for the rest of the world, "the real problem is China" and whether it will leave Hong Kong's democracy intact.

In fact, the crown colony has long experience in the rule of law and considerable individual freedoms, but not much democracy. Only in the very last of its 155 years under Britain has some representation been given to the overwhelmingly Chinese population. Not until 1991 were the first direct elections to a portion of the seats in the legislature held, in a belated British bid to set the political parameters for Hong Kong after 1997. In 1992, in reaction to Tiananmen, Governor Chris Patten proposed to broaden the representation further without consulting China in advance. Even now some in Hong Kong think the democratizing process has gone too far. "I don't see the necessity when we've had good, competent people appointed in the past," says Richard Zimmern, the 25-year-old British-educated barrister grandson of Francis. "Just because they're voted in, they're not necessarily any better."

China will certainly be judged on how it deals with Hong Kong's political aspirations. But important as those are, Hong Kong's survival and well-being depend more on how well Beijing lives up to the broad Western values guaranteed by the Basic Law, a kind of miniconstitution it approved along with Britain in April 1990. China's leaders put their names to a document maintaining the rule of law, an independent judiciary, civil liberties including the right to peaceful protest, a free press, continuation of the capitalist system, a separate identity in international economic bodies, local control over currency and no taxation by Beijing.

But plenty of people in Hong Kong are still concerned that their civil liberties are not protected well enough. When Tung attempted to curtail public protests even moderately, he ran into an international hailstorm of criticism. Observers grew even more anxious when Tung publicly suggested on the eve of this year's June 4 rally that it was time for Hong Kong to "forget the baggage" of Tiananmen. The Independent Commission Against Corruption is widely credited with cleaning up Hong Kong's notoriously graft-riddled police and civil service in the late '70s and maintaining a staunch bulwark against the rampant bribery, kickbacks and favoritism that have infected the mainland. So when a Tung spokesman indicated that the word independent was being dropped from its English name because it did not appear in the Chinese, Hong Kong again suspected the worst. (It was all just a technicality, the spokesman later said, leaving the English name intact to calm the critics.)

Much of Hong Kong fears China's notorious corruption will ooze across the border. "Of course it will filter into Hong Kong," warns a Western diplomat on the mainland who handles scores of such complaints. "It's inevitable because it's cultural, it's the way business is done here." To that, tough Lily Yam, the new chief of the Anticorruption Commission, responds, "Do I have the nerve to pursue an investigation if it involves someone very important? The answer is an unequivocal yes." Anthony Neoh, 50, chairman of the Security and Futures Commission, must find a way to regulate bad influences from the primitive markets in China, whose rash practices and lack of rules could pollute Hong Kong's financial structures. China does not apply the "same culture, system and law" as Hong Kong, he says: "We have to make sure the culture of transparency and accountability will continue."

Rich socialites like Elizabeth von Pfeil, daughter of Francis Zimmern, and lavish-living bankers like Andre Sukjin Lee say the main thing they dread is street crime, long virtually unknown. Lee's town house was broken into recently, and police blamed illegal immigrants from the mainland. "We've been a very safe place," says Von Pfeil. "But what will our police force be like now?"

Those who feel most strongly that Hong Kong is on the road to ruin focus on the broad and still ill-defined area of Hong Kong's future civil liberties. When Tung recently named Andrew Li, a 48-year-old barrister highly respected for his independence, as the Chief Justice of the SAR's new Court of Final Appeal (in effect its Supreme Court), the appointment was intended to reassure the human-rights crowd, and it did. But many of them doubt even Li can stand up to pressure from Beijing when the first political case reaches his bench. They are sure China will prove unable to cede true autonomy to the SAR for fear of losing control of it and, in the process, of the restless hordes of mainlanders who look to Hong Kong as a political model. "This is just the beginning of our difficult encounters with draconian measures," predicts lawyer and Democratic Party vice chairman Albert Ho.

The loss many anticipate first is freedom of the press. Most local journalists don't foresee army troops storming into their offices and shutting down operations. "I don't think they would risk such a move in the coming years because the foreign media will be watching," explains Lee Yee, editor of a Chinese-language political magazine called Nineties. But many journalists are convinced a sizable number of their colleagues are already guilty of self-censorship, even though it is hard to prove. "Some editors think China will pressure them, so they're backing down themselves," says K.C. Chan, deputy editor in chief of the prestigious Hong Kong Economic Journal. Chief editor Joseph Lian, who writes the publication's tart editorials, says "any self-censorship now taking place is to curry favor rather than escape punishment."

The dilemma facing Hong Kong's democrats is whether they should cooperate with China and pressure it quietly behind closed doors, as Tung proposes, or openly confront Beijing. A law-abiding attitude won't impress Beijing, says Ho. "We may come to the point where there is no alternative to civil disobedience." A poor laborer like Lee Man Ko thinks demonstrations are a luxury. "If they protest and it gets better housing for us, good," he says. "If not, it's just a bad disturbance of public order."

More problematic are those who aspire to be the Hong Kong equivalent of Tiananmen's tankman. The radical democratic group Alliance in Support of the Patriotic Democratic Movement in China, which sponsors the annual June 4 candlelight memorial that attracted almost 55,000 citizens to Victoria Park this year, shocked its moderate audience by announcing that its ambitions now extended to ending one-party rule in all of China. By virtually daring Beijing to come and get them, the alliance is entering uncharted waters. Martin Lee's mainstream democrats will continue to demonstrate gently in order to educate the public about the need to preserve and protect the rights they enjoy. Since dissent is a fact of life in Hong Kong, the incoming government has little choice but to let it continue. Tung has declared publicly that he will avoid making martyrs of those who protest before some 8,000 journalists staked out on handover night. The Chief Executive and his Beijing superiors are well aware that televised images of repression in the streets of Hong Kong would deal a lethal blow to that ephemeral commodity known as confidence, on which Hong Kong's continued prosperity and stability depend. It is the very evanescence of Hong Kong's assets that makes the transition such a delicate rite of passage.

The West is watching all this with a skeptical eye. Like it or not, victory in the cold war has given the democratic nations the power to set the world's rules and Washington the presumption to decide who meets them or fails. Communism is discredited, and China has a long, sorry history of repression and