Hong Kong has a much longer history than this, but I don’t think it’s important for understanding what’s going on today.
Anyway, in the early 19th century, Hong Kong was a port island used by British trading companies (known as hongs, and which are now pretty much controlled by Chinese interests) selling opium from India to the mainland. This more or less paid for the large amounts of tea the hongs were exporting to Britain. When China banned opium trade in 1839, the resulting outflow of gold from Britain was large enough to create a balance of payments crisis. So Britain invaded China (twice), burned down part of Beijing, restored the opium trade, and eventually extracted from China a 99-year lease on Hong Kong island and surrounding territory.
After WWII, Hong Kong became an important haven for refugees from the civil war for control of China between Mao and Chiang Kai-shek.
Soon after Deng came to power, he announced the lease, which was slated to end in 1997 would not be renewed and the British-held territories would revert to the mainland in 1997. The two sides negotiated a 50-year transition period, during which Hong Kong would be a Special Autonomous Zone (SAR), nominally a part of China but with its own government.
The businesspeople I knew at the time, as loyal supporters of the UK, were initially very fearful about what their fate would be once the turnover took place and were eager to obtain UK citizenship. The British Parliament, however, decided that the climate differences were too great for HK Chinese to be comfortable in the UK and would only issue official ID cards, not passports. (The UK is offering a road to citizenship now, though. Global warming can’t be the only reason.)
the opportunity of a lifetime
Hong Kong businesspeople soon realized that Deng’s “Socialism with Chinese Characteristics” was actually an almost unbelievable opportunity to act as middlemen between the mainland and the rest of the world. Almost overnight, they ditched their old-school British suits in favor of Chinese garb, reconnected with friends and family on the mainland and began to learn Mandarin.
Until relatively recently, this has remained true.
the Hong Kong stock market
There are three important stock markets for China: Hong Kong, Shanghai and Shenzhen (for tech stocks). All three are linked through “Stock Connect” in a way that allows any to be traded through the others. What makes Hong Kong stand out to me among the three is that the exchange itself had a major overhaul in the 1980s to make it more open, honest and transparent (by the same official who cleaned up Singapore after the Pan Electric scandal). Also, Hong Kong has had a large community of securities analysts and portfolio managers who have a deep understanding of the Chinese economy and the character of the publicly-traded companies operating there. So it has been the ideal place for China companies to offer large amounts of stock to an international audience.
bringing Taiwan back into the fold
The conventional wisdom until recently has been that, because Taiwan is the far greater prize of Beijing, China would demonstrate through its kid-gloves handling of Hong Kong that reintegration with the mainland wouldn’t be so bad–more of a formality than anything else
Why the crackdown?
I have no idea. From a pragmatic point of view, Xi reneging on the 50-year SAR deal with Hong Kong makes no sense. It validates any fears Taiwan might have about how it would be treated as part of China, and by destroying the human infrastructure of financial firms in Hong Kong, it erases China’s ability to raise public capital from the outside world–like maybe a distressed debt investors who would take property loans off the books of Chinese financials.