In the early 20th century Hong Kong began a gradual shift away from trade to manufacturing. This move was hastened by the civil war in China during the 1920s and by the Japanese invasion in the 1930s, when Chinese capitalists fled to the safer confines of the colony. When the US embargo on Chinese goods during the Korean War threatened to strangle the colony, it was forced to increase its manufacturing capacity and develop service industries, such as banking and insurance. Hong Kong's existence was threatened again when the Communists came to power in China in 1949 and during the Cultural Revolution in the 1960s. Although the Chinese could have re-taken Hong Kong with ease, a precarious peace prevailed.
In December 1984, the British agreed to hand over the entire colony when the lease on the New Territories ran out in 1997, rather than hang on to a truncated colony consisting of Kowloon and Hong Kong Island. The agreement theoretically allows Hong Kong to retain its pre-1997 social, economic and legal systems for at least 50 years after 1997. As the handover approached, controversies raged over the building of Hong Kong's expensive new airport and the amount of democracy the Chinese were willing to accept.
Hong Kong has suffered fallout from Asia's economic crises in the late 1990s, and has experienced rising unemployment, falling property prices and close to zero growth. However, although not as robust as it has been, Hong Kong is still a vibrant financial centre - and one of the world's great cities. China's official policy with regard to Hong Kong is 'one country, two systems', and the common view is that as long as Hong Kong continues to make money (and little noise) its autonomy is assured. But a number of crucial interventions by Chinese authorities in Hong Kong's affairs have made it evident that there is not quite as much autonomy going on as the slogan suggests. Nevertheless, the European Commission has described Hong Kong as one of the freest societies in Asia despite not having full democracy. It appears, on the surface that little has changed since the handover.