Spirits dampened by communist clouds on Hong Kong's horizon

A faded Union Jack, besmirched by smog, hangs limply in the subtropical humidity of downtown Hong Kong - a portent of Britain's rather anticlimactic disengagement from its last great Far-Eastern colony.

The air is heavy with the anxiety of Hong Kong's 5.5 million people over the British decision to withdraw, announced by Foreign Secretary Sir Geoffrey Howe in April. By 1997, when Britain's 19th century lease on most of the territory expires, Hong Kong - in lieu of feting its independence - must hoist a bright, red flag and pledge allegiance to Peking.

''The crux of the matter is that Hong Kong people have a genuine fear of communism, and the track record of how the Chinese government treats her people is not all that encouraging,'' says Rita Fan, a college administrator and member of the Legislative Council, Hong Kong's appointed legislature. ''Hong Kong people need a way out,'' she says.

The colony's 2.7 million British passport-holders have no automatic right to reside in the United Kingdom, and London has bluntly dismissed requests that it make arrangements for these people to emigrate to other countries. Only a handful of residents, mainly the rich, well-educated professionals needed to keep the economy and bureaucracy of this free port afloat, can hope to qualify for permanent visas to Australia, Canada, or the United States - the three main destinations of Hong Kong emigrants. Many of them are busy packing.

''The question is no longer whether to leave, but how to do it,'' says Paul Lam, a middle-age insurance broker, who will move to Toronto with his family this summer to set up his own insurance business. ''Most of my friends want to get out. They aren't even staying for sentimental reasons,'' Mr. Lam says.

Yet the vast majority of Hong Kong's 99-percent Chinese population await the future with resignation. These people are poor, blue-collar workers who do not have relatives abroad to help them emigrate. Refugees or children of refugees who fled China after the 1949 communist revolution, few believe Peking's oft-repeated promises to let Hong Kong keep its laissez-faire economy, political autonomy, and freewheeling way of life. Many look to 1997 with frustration, if not despair.

''I hate communism,'' groaned a taxi driver who swam to Hong Kong through shark-infested waters from China's southern Guangdong Province in 1969. Asked whether he planned to leave the colony, he sighed, ''Where could I go?''

Uncertainty is taking a heavy toll on the colony's young people, whose modern , Western attitudes - spawned alongside Hong Kong's spectacular economic growth during the 1970s - clash deeply with both Marxist ideology and the traditional Confucian mores of their parents.

''A lot of young people can't see their way through, they are losing their sense of purpose,'' says Selina Chow, executive director of a local media firm and legislative councilor. ''They don't know what they're working for,'' she says.

Morale has also plummeted among rank-and-file Hong Kong civil servants and police, who are apprehensive about their role in a Peking-ruled Hong Kong.

''Their anxieties were brought into very sharp focus by Sir Geoffrey's statement (on British withdrawal),'' says a Western analyst.

China's decision, announced in May, to station several thousand People's Liberation Army troops here after 1997, further undermined the esprit of local security forces. Despondency among the police - mainly young, unmarried men living in crowded, government barracks - could make it hard to contain another spate of looting and rioting like that was sparked by a taxi drivers' strike in January, says a Hong Kong police inspector.

Nevertheless, a few brave, well-educated Hong Kong residents - galvanized by the British decision to relinquish sovereignty - are coming to grips with the future. The best guarantee against Chinese meddling in local affairs after 1997, they say, is expanded self-rule today.

''We can't afford to ignore politics anymore,'' says Ms. Fan. Business people , academics, trade unionists, interest-group heads, public officials, and students - united in the belief that Hong Kong is on its own - have become a chorus for democratic reform.

Their motto - Gong yan ji gong, or ''Hong Kong people rule Hong Kong'' - has widespread public support, as do their proposals for a gradual transfer of power from British administrators to locally elected citizens over the next 13 years. Moreover, they have won belated backing from the colonial government, which has until now denied Hong Kong all but extremely limited self-rule.

''The people of Hong Kong are ready for democracy,'' says Andrew Wong, a lecturer in public administration at the Chinese University of Hong Kong. ''But you can only learn it through practice. Once people are given the opportunity to participate, they will accept the responsibility.''

Mr. Wong and others hope that once authority lies squarely in the hands of local people, confidence will rise, jittery nerves will steady, and Hong Kong will turn with renewed assertiveness to its business as the world's third-largest financial center.