HONG KONG — Tim Freshwater, Asia vice chairman of Goldman Sachs Group Inc., gazes across the Hong Kong skyline from his 68th-floor window toward a rectangular building that houses the barracks of China's People's Liberation Army.

"Remember all that fuss about the PLA marching in?" says Freshwater, 62, recalling the dawn scenes on July 1, 1997, when 4,000 Chinese troops rolled across the border hours after Britain handed sovereignty back to Beijing, ending 156 years of colonial rule. "There was all sorts of drama about what might happen to the war memorial."

Ten years later, Britain's memorial to the war dead remains undisturbed. The PLA's soldiers are mostly confined to barracks, surrounded by a growing army of bankers, fund managers, lawyers and accountants. The newcomers pay as much as $17.50 a square foot a month — rivaling London and New York — to lease the glass-and-steel offices that now tower over the beige, 28-story symbol of Chinese military power.

When mainland Chinese leaders fly down from Beijing to celebrate the handover anniversary on July 1, they will find that the teeming, 450-square-mile enclave on the Pearl River delta has even stronger capitalist characteristics than it did in its colonial days.

Hong Kong is now home to the world's sixth-biggest stock market (up from eighth in 1997), and last year it overtook New York to become the biggest market after London for initial public offerings.

Its island-studded harbor, overlooked by the gravity-defying apartment blocks that cling to the slopes of Victoria Peak, was last year the world's second-busiest container port.

In January, Hong Kong was named the world's freest economy for the 13th year by the Heritage Foundation, a Washington-based advocacy group, which cited its low taxes, openness to investment and lack of tariffs. Hong Kong's corporate tax rate is 17.5 percent, compared with a top corporate rate of 20 percent for Singapore. "Our main target is to turn Hong Kong into a New York or London of the East Asia time zone," says Donald Tsang, Hong Kong's Beijing-sanctioned chief executive.

Not all of the changes since the hand-over have been for the better. The city today is swathed in pollution, with air quality so poor that the government advised people with asthma or cardiovascular disease to stay indoors on 41 days last year.

The city is facing competition from Shanghai and other locations such as Singapore. Hong Kong's leaders are struggling to deliver on promised democratic reforms, while the gap between rich and poor is growing.

"We have a split economy," says Marc Faber, 61, who oversees $300 million at Marc Faber Ltd. in Hong Kong and has managed money in the city for 34 years. "The super-rich, the money shufflers and lawyers, are doing exceedingly well. However, the lower and middle classes are doing just so-so. Hong Kong today is extremely dependent on the financial sector, and it could suffer rather badly in a downturn."

Under the arrangement known as "one country, two systems," the city in 1997 became a Special Administrative Region of the People's Republic, with Beijing guaranteeing it autonomy, except over defense and foreign policy, for 50 years.

China's communist leaders pledged not to tamper with Hong Kong's way of life and its laissez-faire economy. It would retain its own currency — the Hong Kong dollar, which is pegged to the U.S. dollar — and its British common law system, administered by judges in horsehair wigs.

Beijing also agreed to let Hong Kong keep other forms of economic and legal independence, including separate membership in the World Trade Organization.

Unconvinced, 545,000 people — one-twelfth of Hong Kong's population — mostly refugees or the children of refugees from communism, emigrated between 1984 and 1997.

The oldest British-owned company, Jardine Matheson Holdings Ltd., moved its headquarters to Bermuda and its stock listing to Singapore. Fortune magazine ran a cover story titled "The Death of Hong Kong." Milton Friedman, the late U.S. Nobel Prize-winning economist, predicted that within two years of the handover, Beijing would impose capital controls and do away with the Hong Kong dollar.

Instead, China stuck to the deal, says Chris Pratt, chairman of Swire Pacific Ltd., a British-owned company that opened its first office in Hong Kong 137 years ago. Swire controls Cathay Pacific Airways Ltd., the world's eighth-largest airline by market value, which in 1997 did not fly to the mainland.

Today, Cathay has 400 flights a week to the mainland — more than any foreign-owned carrier — most through its Dragonair subsidiary. Cathay bought the 82.2 percent of Dragonair it didn't already own last year for $1.1 billion and doubled its stake in Air China Ltd., the mainland carrier, to 17.5 percent.

"We took the view China meant what it said about Hong Kong," says Pratt, 50.

Although mainland China has two stock markets of its own, in Shanghai and Shenzhen, Hong Kong remains the No. 1 source of capital for the world's fastest-growing major economy.

Hong Kong IPOs raised $43 billion in 2006 compared with $10 billion in 1997. That total included $16 billion of the $22 billion raised last October by Industrial & Commercial Bank of China in the world's biggest-ever share sale (the other $6 billion was raised in Shanghai).

In terms of personal wealth, Hong Kong is home to the most U.S.-dollar billionaires per capita, says Kathryn Shih, Hong Kong- based Asia-Pacific head of wealth management at UBS AG. That's 29 in a population of 7 million. One in every 50 residents is a millionaire, Merrill Lynch & Co. and Capgemini SA reported in a 2006 world wealth survey.