POLICE have found illegal immigrants hiding in the Kowloon Walled City and believe there could be more using the condemned maze of alleyways and crumbling buildings as a refuge. The mainlanders know their way around the labyrinth and have set up home, police believe. Acting Chief Inspector Jonathan Fraser, the last officer to hold the now-defunct post in charge of the Walled City, said yesterday that two illegals immigrants were chased in there after an attempt to rob a grocery store in Wong Tai Sin three weeks ago. But while Mr Fraser does not believe police have a big problem on their hands, they may step up operations when the demolition of the 2.7 hectare site begins later this month or early in March. ''There is no indication now that there is a problem, but everybody is aware that the Walled City is there and it's a place to hide,'' Mr Fraser said. ''When illegal immigrants come to Hongkong they are looking for temporary work and somewhere to live - a construction site is ideal. It's maybe that the Walled City provides the ideal home.'' On average, Kowloon City Division police arrest one illegal immigrant every day in their area, which includes the Walled City. During 100 years of infamy, the Wall City has been described as a slum, a squalid eyesore, the city of darkness, and even the cancer of Kowloon. Now the 8,800 flats stand empty; the 1,500 clinics, 570 workshops and 148 shops little more than shells. Even the rats have gone, deprived of their source of survival - man and his rubbish. The Walled City is not a desirable residence. ''There's no water, no electricity, it would have to be a desperate person who chose to live in there,'' Mr Fraser said. But police are keeping a lookout. Yesterday, the smell of cooking gas had Mr Fraser peering down dark alleyways and stairwells, a large spanner in hand, but no unwelcome visitors were found. Details of the Walled City's demolition are expected to be announced soon. The Civil Engineering Department and the Hongkong half of the consortium, Express Builders, will meet today to discuss a timetable. While some single-storey buildings and temporary structures have already been destroyed on the eastern side of the city, the Civil Engineering Department is waiting for a structural survey before Hongkong's biggest demolition job can get underway. At the end of this month, members of the American Cleveland Wrecking Joint Venture arrive in Hongkong, bringing with them an array of equipment to destroy the city. Conventional methods will be used, because explosives have been deemed to be too dangerous.