Hong Kong's international significance accelerated in the second half of the 20th century--not only from the explosive growth of its industry but also from the reemergence of China as a participant in world trade and politics. It is strategically positioned at the center of the most rapidly growing area of the world--the Pacific rim. A philosophy of free trade and minimal taxes and regulations attracted investment from around the world. Its location in respect to the trading day made it the center of world trading while London and New York City sleep. It is also the gateway for trade with the most populous nation on Earth. China depends on the territory to provide the bulk of its foreign exchange and investment.

Hong Kong has no substantial natural resources, and 90 percent of what it needs is imported. Much of its income is from services it provides as a transshipment and warehousing gateway between China and Southeast Asia and the rest of the world. Manufacturing is led by the textile industry, followed by toys and electronics. Hong Kong exports more watches, clocks, and radios than any nation in the world. China and the United States are its major customers.

Despite the strength of the manufacturing base, the service sector of the economy is larger than the industrial sector and provides three quarters of the jobs. Hong Kong is the shopping, dining, fashion, and entertainment mecca of Asia. It is the movie capital of the world, with more feature films and videos produced in the territory than anywhere else.

Government and History

Hong Kong is a Special Administrative Region of the People's Republic of China under the principle "one country, two systems." Under the Basic Law, the constitution adopted for Hong Kong in 1990, the former British colony enjoys a capitalist economy, a free port, a separate customs territory, and its own currency and finances. A chief executive heads the Executive Council, which is responsible for enforcing laws passed by the 60-member Legislative Council. China manages Hong Kong's foreign and military policy but has promised not to impose socialism before 2047.

The Chinese were forced to cede the island to the British in 1842 following their defeat in the First Opium War. According to one legend, the Chinese named the settlement Heung Keung, or "Fragrant Harbor," because of the scent of Indian opium that came from the British clipper ships waiting to make their run up the Pearl River to Canton with their cargo of the addictive drug. Beginning with the Taiping Rebellion in 1850, Hong Kong grew rapidly. Civil wars and economic and social changes in China drove various waves of refugees into the territory. At the end of the Second Opium War in 1860, the British forced the Chinese to cede part of the Kowloon peninsula. In 1899 the British took a 99-year lease on the New Territories. China always considered the agreements to be "unequal treaties."

The events of the 1930s and 1940s played havoc with the population of Hong Kong. Nearly 880,000 people lived there in 1931. Chinese refugees nearly doubled that number after Japan occupied Canton in 1938, at the outbreak of World War II. Three years later, in 1941, Japan occupied Hong Kong and arranged mass deportations because of food shortages. Japanese occupation and Allied bombing decimated Hong Kong's population, which dropped to about 600,000 by the end of the war. The population once again rebounded after the British resumed control of the territory following the conclusion of World War II.

The Communist victory in mainland China in 1949 drove hundreds of thousands of refugees into Hong Kong, and it became a base for Western "China watchers." Many Chinese lost their lives trying to swim over the border through shark-infested Mirs Bay. By the mid-1950s the colony had some 2.2 million people.

Hong Kong did not have enough housing or jobs for so many people. A public housing program, introduced after a fire left 53,000 squatters homeless in 1953, expanded to accommodate about half the population before the end of the century. The economy, previously dependent on the port, diversified with the construction of textile and other factories. Labor unrest in 1967 erupted into riots instigated by proponents of the Cultural Revolution in China.

With the death of Mao Zedong in 1976, the new Chinese government moved to negotiate a peaceful solution to the "unequal treaties" problem and to arrange a return of the territory to China's jurisdiction at the expiration of Britain's 99-year lease of the New Territories. Under the Sino-British Agreement ratified on May 27, 1985, Britain agreed to return sovereignty in Hong Kong to China on July 1, 1997. China agreed to maintain the same form of government and personal freedoms, but the violent suppression of the democracy movement in Beijing in June 1989 ended the perception that China would exert only minimal authority after the 1997 transfer of power. Thousands of educated professionals were emigrating at a rate of 1,000 a week in 1990, mostly to the United States, Canada, and Australia. In an effort to keep key jobholders in place, Britain offered full passports to 50,000 Hong Kong families to provide them legal refuge in 1997 if they need it. China, however, announced it would not recognize the British passports. The British government also took measures to strengthen laws concerning democratic processes and basic human rights in the country, leading to the ratification of a new constitution, called the Basic Law, in 1990. In 1991 Hong Kong held its first direct elections for the Legislative Council in 150 years of British rule. Pro-democracy forces won most of the contested seats.

In December 1996 a selection committee approved by the Chinese government chose the shipping magnate Tung Chee-hwa to become Hong Kong's first chief executive when the British governor stepped down in July 1997.