365 days, and counting

Mr Leung, a fortune-teller in Kowloon, wears a dark suit, white shirt and tie. The walls of his booth at the busy Wong Tai Sin temple are decked with testimonials to the accuracy of his predictions. And when he pronounces, it is in a voice that is quiet, firm and reassuring.

"It will be very smooth and peaceful, both politically and economically," he declares. "The Hong Kong people will be very rich."

Exactly a year from now, at the stroke of midnight on 30 June 1997, an event unique in history will take place. Many colonies have gained independence from imperial rulers, and many large countries have swallowed up small neighbours. But never before have those two processes merged, as they will when Britain's lease expires and China, the freeholder, regains possession of Hong Kong.

For people here, this prospect of being liberated and annexed in the same moment evokes feelings more mixed than we might expect, and Mr Leung the fortune-teller (specialities: previous lives and auspicious days for weddings) is by no means alone in his optimism.

Near the temple, in a high-rise housing estate, the old men sit gossiping and gambling, playing checkers and mah-jong, while children play ping- pong. "We'll be happy on 1 July," says one man firmly. "We should belong to the mainland."

Another man, in his fifties, is enraged that a British journalist should ask questions about the handover. "The British should go away by that day. We will go to the mainland Chinese - and the British should leave!"

It is, as a general rule, the younger generation, especially the better- educated, who are anxious. The older people may, in many cases, have fled the mainland, but they retain their bonds; it is the young who feel psychologically distanced from it. To them, the Chinese are "they".

Frankie Wong, a bank employee aged 25, said: "It would be more democratic for Hong Kong Chinese to rule Hong Kong - or even for Hong Kong to stay under the rule of the British. The Chinese are lousy in their promises. After 1997, all freedom of speech will go."

A young couple who work in a pharmacy echo his fears: "It'll be more dangerous here. Many people will leave. But what can we do? The rich people can get passports. They will go, and the poor people will stay behind. We'd love to go to Australia. But it's only a dream."

In their different ways, the people of Hong Kong are preparing, or bracing themselves, for the unique experience that lies ahead.

But the change is not just something to be waited for; it is already happening. The creeping mainland-ification of Hong Kong has begun - bringing with it a multitude of little fears and accommodations. Everybody now seems to be learning Mandarin Chinese, as spoken in Peking, (as opposed to the local Cantonese) to be able to communicate with the new powers that be.

And others go further, even to the point of ingratiation. A giant new foreign ministry building is under construction in Hong Kong, and it is being paid for not by Peking, but by one of Hong Kong's best-known tycoons.

At the construction site, the workers too appear determined to please, for a little portrait of Chairman Mao dangles from a driving mirror in a lorry. The explanation is different, but just as pragmatic: "It stops us getting given parking tickets. The policemen see the picture inside the windscreen - and they guess that we might have something to do with the Chinese side. That's very useful."

In some respects, the changes are undeniably positive. Many Hong Kong people talk of their relief that the place has, in some respects, come of age. The absurd situation where Britons were able to get the best jobs has come to an end.

Inside the concrete block of the Supreme Court, you still find bewigged English lawyers who understand no Cantonese defending clients who understand no English. But the justice system too is adapting. In the latest round of appointments, few Hong Kong lawyers sought to be named as QCs; Queen's Counsel will not be a title to show off in the new Hong Kong.

Hong Kong's Happy Valley racecourse is part of the Royal Hong Kong Jockey Club. At least, it was until today. From tomorrow, the club will be known simply as the Hong Kong Jockey Club. It has ditched the "Royal", lest it offend the new rulers.

For the first 40 years of the club's existence, Chinese were banned from being members of the club, just as they were banned from living in the most exclusive part of Hong Kong Island, on the Peak. In mainland China, betting is still (officially) banned - but the Jockey Club, at least, seems set to stay, under its new name.

And where the change is not happening, plans are usually being laid. The 19th-century Government House, on the hillside overlooking the harbour, where Chris Patten, the last governor, still resides, will become a Museum of the History of Colonialism. "I look forward to seeing the room devoted to the exodus of refugees to Hong Kong from Communist China," was Mr Patten's tart comment. Meanwhile, the British are building themselves a new consulate, designed by Terry Farrell, the man responsible for MI6's new bunker on the south bank of the Thames.

As for the essentials of Hong Kong's existence, China keeps insisting that these will not alter. "One country, two systems" is the phrase. Or, in the words of the Basic Law agreed by the Chinese: "The socialist system and policies shall not be practised in the Hong Kong Special Administrative Region, and the previous capitalist system and way of life shall remain unchanged for 50 years."

Officially, then, it will be "Hong Kong people ruling Hong Kong", but does anyone believe this? Peking officials and Hong Kong businessmen insist as one that China does not wish to kill the goose that lays the golden eggs. James Tien, a garment manufacturer and member of Hong Kong's legislative council, says: "It's not that business is pro-China; China is pro-business. Prosperity is the one thing on their minds."

British businessmen, too, are often keen to sign up for the "stop whinging about politics" line. Brigadier Christopher Hammerbeck, of the British Chamber of Commerce in Hong Kong, who speaks in bursts of angry gunfire, complains of the "Fuhrerbunker" up the hill, whence Mr Patten is always criticising Peking instead of making the sweet noises which (in Brigadier Hammerbeck's view) would be much better for British business. Talk of business getting too cosy with China is, he insists, "a load of crap". "We're not kowtowing. We take a pragmatic view ... Don't think I've gone soft on Communism. But look at the size of our investment here.

"Principles are fine," he adds. "But you've got to be able to afford to have principles."

Martin Lee, whose Democratic Party gained the largest share of the popular vote in elections last year, begs to differ. "They're putting a noose around the neck of the goose, to control it."

He has some hard evidence on his side; indeed, if recent comments by the Chinese official with responsibility for policy on Hong Kong are anything to go by, the Chinese may be ready to slaughter the goose rather than harness it.

Lu Ping, head of the Hong Kong and Macao Affairs Office in Peking, suggested that China would "take steps" to prevent demonstrations, while Hong Kong newspapers would "absolutely not" be permitted to advocate a policy of two Chinas. Mr Lu is not Hong Kong's favourite politician: when he visited in April there were protests and tyre-burnings.

The effects of his tough talk are evident. Self-censorship is creeping in to the Hong Kong media: references to the Tiananmen massacre and criticisms of China are toned down, as everybody becomes conscious of the revenge that the Communist authorities could yet wreak.

"China wants draconian powers - and clearly wants to use them," says Martin Lee. Popular protest, such as the big demonstration on the Tiananmen anniversary this month, will be useless against the Chinese People's Liberation Army. "What can the people do, when the PLA is stationed here?"

Even civil servants think twice about their future, despite their curious 1997-speak. Take the official who insists: "1997 is an opportunity, not a barrier. The Chinese side doesn't see eye to eye with the Democrats. But China is very supportive of our economic progress." The only reason why anybody sounds worried, he insists, is foolishness or colonial sour grapes.

But ask him whether he has another passport in his back pocket, just in case, and he explodes. "I do not wish to answer that question. That has nothing to do with it." A Hong Konger who witnessed this outburst had no doubt about its meaning. "Of course he's got himself a foreign passport. And he's ashamed."

Yet there remains a remarkable insouciance. All over Hong Kong, you can buy T-shirts which celebrate "1 July 1997: a day to remember". Down by the old Star Ferry, which shuttles passengers between Hong Kong Island and Kowloon, one of the T-shirt sellers is quietly pleased: "We had no problems with the British. They brought us many things. But it's good that at last a Chinese person will be in charge."

Mr Patten may be respected by many, but Hong Kong people are often gently ironic when discussing the moves towards democracy he has introduced: "We all like democracy. But it didn't come for more than 100 years. You could say that that it comes a little too late."

For some, there is the brave hope that the merging of the two systems will be in Hong Kong's favour rather than Peking's, that Hong Kong can be a democratic canker which will rot the Communist apple, not the other way round. Daniel Fung, the suave young solicitor-general - Armani glasses, tailored suit - insists that in terms of the legal framework, things may be going Hong Kong's way more than China's. He points to the number of laws that China has begun to "plagiarise" from Hong Kong as evidence that China is gradually becoming a law-based state.

Mr Fung argues, too, that there is a kind of China-Hong Kong merger, with the children of Chinese Communist leaders now attracted by the bright lights of Hong Kong. "They wear Gianni Versace. They punt on our horses. They like the Hong Kong life. And they like their currency being safe ... I would say we're likely to see an exponential development of political pluralism [in mainland China] in the years to come."

To China, the regaining of Hong Kong is a matter of pride for the whole country. On Tiananmen Square in the heart of Peking an electronic clock counts down the seconds until midnight on 30 June 1997. Likewise at the border between Hong Kong and China. The feelings of the Hong Kong people themselves about the change are almost irrelevant.

As a result, arguments continue over the nature of the ceremony, and at one stage it seemed that two separate ceremonies, one for the departing rulers and one for the new arrivals, would have to be held. So despite the predictions of Mr Leung, the fortune-teller at the Wong Tai Sin temple, a smooth handover a year from tonight is by no means guaranteed.

A Hong Kong acquaintance reckoned that in any case Mr Leung was way off beam. In holding out the prospect of a smooth handover with riches to follow, Mr Leung had quoted from a poem which describes grasping for the moon, beautifully reflected in tranquil water. The sceptic insisted that, far from reassuring us, the poet was pointing out that everything was an illusion: "Things appear to be peaceful, on the surface. But there are invisible currents, underneath. Touch the water, and the beautiful, harmonious image breaks up.

"Everything is promised - and nothing comes true."