In the two ‘opium wars’ faught between China and Britain between 1839 to 1860, Britain ceded the part of Hong Kong island in perpetuity. Further China was weakened due to defeat in Sino-Japanese war of 1894-95. In 1898, China signed the lease contract to give British full jurisdiction of remaining Hong Kong that was necessary to ensure proper military defence of the colony around the island. The lease agreement was for 99 years expiring on 30 Jun 1997, with zero rent. Claude MacDonald, the British representative during the convention, picked a 99-year lease because he thought it was “as good as forever.”  Part ceded and part leased, made it unfeasible to return the leased land alone as it would have split Hong Kong in two parts. The Chinese also started to pressure the British to return all of Hong Kong, taking the position that they would not accept so-called “unequal treaties” that were imposed on them by colonial powers.

Hong Kong propspered in 20^th century. However facing the uncertain future of Hong Kong, Governor MacLehose raised the question in the late 1970s about lease agreement. The expiry of lease in 1997 created problems for business contracts, property leases and confidence among foreign investors. In 1983, the United Kingdom reclassifed Hong Kong as a British Dependent Territory (now British Overseas Territory) when reorganising global territories of the British Empire. Talks and negotiations began with China and concluded with the 1984 Sino-British Joint Declaration.

The declaration stated that Hong Kong’s sovereignty will be transfered to the People’s Republic of China on 1 July 1997, when Hong Kong would remain autonomous as a Special Administrative Region and be able to retain its free-market economy, British common law through the Basic Law, independent representation in international organisations (e.g. WTO and WHO), treaty arrangements and policy-making except foreign diplomacy and military defence.  It stipulated that Hong Kong would be governed as a special administrative region, retaining its laws and a high degree of autonomy for at least 50 years after the transfer.

Reference:

http://www.historyorb.com/day/december/19?p=2

http://www.britannica.com/EBchecked/topic/430163/Opium-Wars

http://en.wikipedia.org/wiki/Hong_Kong

http://en.wikipedia.org/wiki/Convention_for_the_Extension_of_Hong_Kong_Territory