HISTORY does not repeat itself. But any analysis of the relationship between politics and economics in Hongkong could do worse than start with parallels with 1982-83 and 1988-89. Both were periods when confidence over the political situation was suddenly dashed, and when there was a rapid change in monetary conditions. On one occasion a boom-bust political cycle coincided with an economic one so they fed on each other. On the other, the two factors pulled against each other. This time around, Hongkong and Governor Patten have been lucky. The Hang Seng Index is 40 per cent higher than at the start of 1992, the dying days of the governorship of Sir David (now Lord) Wilson, when relations with China were smoother but when ''lame duck'' was one of politer descriptions of the administration. One can debate forever how much weight should be attached to local political rhetoric, or to the march of the ''socialist market'' in China. But there can be no doubt that in recent months it has been overwhelmed by the weight of money. Contrast this with a decade ago. Then, a five-year boom marked by an August 1981 stockmarket peak of 1,810 was beginning to wilt under debt and persistently high world interest rates when the political situation entered a critical period in mid-1982 which lasted until the end of 1983. The coincidence of two bearish forces had the inevitable result - the market fell 50 per cent. The boom had been sustained for a remarkably long time thanks in part to Deng's ''put your hearts at ease'' advice to Hongkong investors and was fuelled by grossly irresponsible lending by banks, particularly to the property sector. So convinced were bankers and investors of a rosy future that for a long time high interest rates failed to dampen 20 per cent annual credit growth. Right up to the currency crisis, the Hongkong government professed itself powerless to control money growth. But the results were disastrous. Monetary promiscuity was the big non-political factor in the September 1983 currency crisis which led to the US dollar peg. Although it has never been admitted, the crisis also frightened the British into their most fundamental concession to China, opening the way to the Joint Declaration a year later. Now, fast forward five years to late 1988. Hongkong has been through the 1987 crash in typically extreme fashion and is powering ahead under the impetus of dramatic growth in China trade, accompanied by general optimism about the future. Re-export tradegrew 50 per cent in 1988 and bank loans and advances for use in Hongkong rose 33 per cent in the same year. THE first half of 1989 saw the process continue and the Hang Seng Index reach 3,300. Then came the China crackdown which was economic as well as political. The regime sought to rein in the inflation - and accompanying corruption and a trade deficit - which had accompanied Zhao Ziyang's rush to capitalism. However, though the stock market fell 30 per cent and economic growth slowed sharply, the corporate sector was not overgeared. As for the banking sector, it actually benefited from the crackdown! During 1989, bank lending in Hongkong dollars grew 30 per cent, cushioning political blows. But domestic deposits grew only 14 per cent. This huge discrepancy between deposits and loans was only possible because of the sudden surge of Hongkong dollar lending by mainland to local banks as South China's exports grew uninterruptedly and the austerity drive generated a large trade surplus. Net lending by mainland banks went from zero in mid-1988 to HK$40 billion within 18 months and has generally continued to rise. Morgan Stanley analyst Michael Taylor has established a fairly direct correlation between Chinese banks' gross Hongkong dollar lending to Hongkong banks and the growth of South China's export trade which is largely HK dollar denominated. In theory, Chinese banks' relationship with Hongkong should grow in line with trade and thus add liquidity to the local banking system and provide a continuing base for loan growth. In addition, Taylor points out, analysis of Hongkong trade figures makes it abundantly clear that through underinvoicing of Chinese exports, huge sums are being generated and mostly retained in Hongkong by tax-avoiding enterprises operating in China and by mainlanders anxious to acquire foreign currency assets. So how vulnerable is Hongkong to a sudden change in the benign aspects of the monetary relationship with China? The most immediate problem is the prospect of a continuing shift of China from trade surplus to deficit. This would probably have a negative impact on Hongkong liquidity as net lending by Chinese banks would fall even if gross lending did not. The weakness of the Renminbi might also constrict capital flight into Hongkong. However, there are many unknowns. If South China net exports remain buoyant regardless of developments elsewhere in China, Hongkong might not be affected. Rapid inflation in China might have a different impact: though it would result in a large trade deficit, it might increase the desire of trading enterprises to hold Hongkong dollar assets. So local liquidity would rise. THE other factor is even more imponderable. How willing will Chinese banks and individuals remain to hold Hongkong assets? No ones seems to doubt the strength of the Hongkong dollar, which barely twitched at the height of Chinese threats. However, Hongkong could be vulnerable to any determined crackdown on corruption and capital flight by Beijing, or to fears by the owners of ill-gotten wealth that it would be a lot safer to hold their assets in US dollars in the Cayman islands than in Hongkong banks whose discretion may be more difficult to maintain as 1997 approaches. Finally there is the trade sanctions question. Any significant interruption of South China's export trade would have liquidity consequences which would have a knock-on effect. This is not to suggest disaster threatens. Mainland banks' gross Hongkong dollar positions only amount to 10 per cent of Hongkong dollar loans. But they can be important at the margin. Stock and property markets have long been a ''liquidity sink'' so they are vulnerable. There is a possibility that the liquidity which has driven up asset prices far more rapidly than the economy has been growing could go into reverse. If nothing untoward happens on the China front there is still one threat hanging over the markets: interest rates. Hongkong has had five years of negative interest rates while most of the rest of the world has had strongly positive ones. It doesn't need a political catastrophe to send the markets into a tailspin: that Messrs Patten and Zhou embraced tomorrow would be nothing in the face of stagnating China trade, higher interest rates and a strong bounce back by the US dollar. For the property sector, last year's imposition of the 70 per cent loan ceiling stabilised prices and could continue to do so. The ceiling can be lifted if interest rates rise. But shares, so many of which are geared to development profits and bank loan growth, are a different story as they are tied not only to the China liquidity and political factors but also to the whims of the foreign fund managers whose influence on pricesof the key Hang Seng Index stocks is profound. Typically, stockbroker HG Asia recently pronounced that the Hang Seng Index could go to 9,000 on the back of the liquidity boom and quieter politics. But, it said, a collapse would surely follow. Those baffled by Hongkong's liquidity springs may be reluctant to rely on their broker's sell bell. It is doubtful anyone understands the dynamics of Hongkong's financial relationship with China, though it, not politics, may now be the force driving medium-term stock prices.