Handling Hong Kong.

EVER since 1984 when the British agreed to turn Hong Kong over to Mainland China, there has been intense speculation as to how far Peking would permit the 155-year-old Crown Colony to keep its free and easy ways in order to preserve its role as a world financial and commercial center -- and the yeast of China's burgeoning export economy. Now, as the turnover date (July 1) rapidly approaches, the dilemma for the Chinese Communists appears double-edged.

There is dramatic evidence of divided counsel in Peking about how to handle Hong Kong's eight million people, their huge foreign-exchange reserves ($60 billion, compared to Peking's own record $105 billion), and its role as an entrepot for the region. But events are taking on all the aspects of a Chinese opera, exposing the feuds and personalities in the Mainland otherwise kept more or less under wraps. And until most vestiges of British rule can be wiped out, Hong Kong looks to remain a showcase for Mainland China's problems.

While the Mainland is in a paroxysm of economic development, at least in those areas adjacent to Hong Kong, Peking's decision-making process is in limbo, dominated by its gerontocracy, the remnant of the revolutionary period half a century ago. Investors, not to say citizens, are constantly vexed by sudden changes in policy. Recently Peking has made a feint back toward Maoist orthodoxy, whatever that might be, warning journalists and writers and filmmakers to come back to the true faith. But even if the frail compromise between bankrupt Marxist theory and old-fashioned Chinese entrepreneurship can be continued, the regime's obscurantism will be hard to maintain in Hong Kong, where there have been few secrets from a wild and woolly local press.

Take the whole issue of who formally will govern Hong Kong. Until recently the Peking line was delivered to Hong Kong's residents via Xinhua News Agency's Hong Kong office, abetted by half a dozen huge government corporations like the Bank of China, China Resources, and CITIC, the Communists' largest commercial/financial arm. Now other entities are coming into the picture, not least the local taipans whose vast fortunes have been built on the Colony's phenomenal prosperity as China's window on the world. Their crown prince is Larry Fung, son of China's vice president, a high flyer who flits between the (ex-Royal) Hong Kong Jockey Club and his estate in Sussex, formerly owned by Harold Macmillan's family. (Fung just bought a large chunk of the Hong Kong subsidiary of CITIC at 25 per cent below the Hong Kong stock-market price.)

A four-hundred-man advisory search committee -- made up of old leftist hacks, local professionals, and these leading capitalists --recently nominated the new Chief Executive of the Special Administrative Zone, C. W. Tung. Tung is a lackluster scion of a shipping empire whom Peking and local capital bailed out of bankruptcy a decade or so ago.

So far, Tung's role has been to make pro-Peking statements and rationalize the Communists' precipitate actions -- such as creating in secret an appointed legislature to take the place of the partially elected British Legislative Council six months ahead of the turnover. With myriad problems to tackle -- for example, how to translate English common law into Chinese, and where the right of appeal ends with the British Privy Council no longer in the act --Tung has diverted his energies to setting up an inordinately expensive (and secure) new office because the feng sui (omens) of the century-old Government House were said not to be good. In any case, he announced that in the nitty-gritty negotiations between the retiring Hong Kong government and Peking, he would sit as a Chinese Communist delegate.

There are lots of tough issues: Hong Kong's proposed new Chinese entity of "one country, two systems" can only magnify Peking's economic conundrums. Chief among them is revenue collection. The central government has a congeries of almost haphazard "contractual" arrangements with its various political divisions for how much each will pay into the central coffers each year; many of these idiosyncratic relationships had their origins in tradeoffs made during the climax of the 1940s civil war.

Shanghai, for example, the old powerhouse of pre-Liberation China and home to a disproportionately large number of Communist Party leaders, had been anteing up most of the central government's revenues. With its infrastructure near collapse, "the old whore of the Yangtze" was given its head four years ago under Deng Xiaoping's new "market socialism." The city took off in a speculative boom, with more office space built in four years than Hong Kong has built in thirty years. And Shanghai's announced intention is to regain its pre - World War II status, replacing Hong Kong as East Asia's financial capital.

Meanwhile, Canton, the southern dynamo of China's recent boom, to which most Hong Kongers have close commercial, linguistic, and even family ties, is picking up only a fraction of Peking's bills. To the extent that Hong Kong's special position -- with its quintessential capitalism -- is maintained, it is going to magnify all these policy problems for Peking. (One of Peking's stream of ad hoc proposals on Hong Kong issues suggested that it might set aside half its foreign-exchange reserves against market fluctuations during the Hong Kong transition. That was met with guffaws here; Peking's entire reserves are less than 20 per cent the value of Hong Kong market investments, and intervention would only feed any panic.)

The so-called Basic Law negotiated between London and Peking to cover the transition included vague assurances that free speech would be maintained. That would really test "one country, two systems." On last year's anniversary of the 1989 student massacre at Tiananmen Square, 45,000 students from Hong Kong's seven, often rambunctious, universities gathered on the Happy Valley racecourse to memorialize their comrades. Last fall they also initiated a protest against a Japanese claim to some supposedly oil-rich atolls in the East China Sea, after Peking had forbidden its own students to participate. When outgoing British Governor Chris Patten moved to enshrine, however belatedly, Hong Kong's civil rights into law, Peking announced its opposition.

What could be the most important test of all is immigration. During the half-century since the end of World War II, Hong Kong's crises have usually turned on the possibility of being swamped by refugees from one of China's periodic upheavals, usually brought on by radical Communist experiments. During these past Mainland blowups a thin line of Hong Kong police and the British Gurkha regiments have stood between the Colony and chaos. The Gurkhas left in November. There are 100 million rootless people sloshing around China, squeezed off the overcrowded land and looking for a livelihood. In neighboring Canton, 10,000 to 15,000 northerners arrive daily looking for work in the booming export industries pushed over the border by Hong Kong's rising costs. Locals say it is inevitable that some -- but how many? -- of them are going to follow "the princelings" (sons and daughters of high Party and government officials) who have pushed luxury apartment prices in the Colony to all-time highs despite the insecurity of the coming takeover.

All this means that the future of China itself, and not just the fate of Hong Kong, is riding on the way the takeover is accomplished.