AMID the chaos of civil war, the Nationalist government in China accused Hong Kong of being a black market for goods smuggled out of the mainland. This was the inauspicious start to a trade partnership that has linked the most populous country with one ofthe smallest, but most dynamic places in the world. After World War II, China was thrown into political chaos, its currency depreciated rapidly and its economy was unstable. The government was saddled with smuggling that further jeopardised the monetary system. A Post report on July 10, 1948, said the Chinese government claimed money being sent back to China was being stolen in Hong Kong. The territory's leaders responded by promising to investigate. Five days later, China sent the Nanking Finance Mission to Hong Kong to step up measures to deal with both problems, and the governments agreed on a joint effort. On August 12, they signed an agreement to set up more customs stations along the border to stop smuggling. Hong Kong also agreed to help reform China's unstable monetary system by setting up a controlled gold-standard currency. A report dated August 20 said the intention of the gold yuan currency was to work against further depreciation by controlling its conversion into other currencies. On August 25, the Post reported that, in three days, the Central Bank of China and its agencies in Hong Kong and other Chinese financial centres had received gold, silver and foreign currencies as well as HK$137,000 in cash from people who had exchanged foreign currencies for gold yuan. However, the Chinese currency continued to depreciate. By early 1949, the Communist forces had won the upper hand. The Nationalist government moved to limit the amount of foreign capital that could be taken out of China - and in so doing made trading difficult. The war compelled many people - Chinese and expatriate alike - to flee. Those who escaped from Shanghai, the financial and business hub of the nation, led a flood of refugees to Hong Kong. It became known as the ''Shanghai Exodus'' and, as the tragedy unfolded, the Post reported it faithfully. Many of those who came to Hong Kong were industrialists - and they were to help shape the Hong Kong of the future. Some smuggled gold from China. They also brought with them a burning desire to work and an acute business acumen. With these, they gave refugees jobs and built enterprises that flourished. Tang Hsiang-chien, who became a leading member of the Hong Kong Cotton Spinners' Association, arrived in Hong Kong in 1949. In the 1970s, when the territory began to establish itself industrially, Mr Tang represented Hong Kong's cotton-spinning mills in talks to import raw materials. Many of those who came to Hong Kong were industrialists - and they were to help shape the Hong Kong of the future. Some smuggled gold from China. They also brought with them a burning desire to work and an acute business acumen. With these, they gave refugees jobs and built enterprises that flourished. Tang Hsiang-chien, who became a leading member of the Hong Kong Cotton Spinners' Association, arrived in Hong Kong in 1949. In the 1970s, when the territory began to establish itself industrially, Mr Tang represented Hong Kong's cotton-spinning mills in talks to import raw materials. He also set up many textile joint ventures in China. In 1984, he was appointed chairman of the Hong Kong Shanghai Economic Development Association, which worked to strengthen co-operation between the two cities. The late Sir Pao Yue-kong, who helped build Hong Kong into a world shipping power, was among the many who fled to the territory in 1949. He was also a generous man, having donated more than $100 million to charities by some reports, many of them in China. The Communist forces continued from success to success and, on October 1, 1949, their leader, Mao Zedong, declared the People's Republic of China. Only a year later, it became embroiled in the Korean War, which pushed the world to the verge of nuclear war. The United Nations imposed sanctions on the mainland. Hong Kong continued to trade with the mainland - as a British UN delegate said, separating Hong Kong from China was ''cutting off the nose to spite the face'' - but steered clear of breaching the embargo on industrial goods. This period was to change the territory's economic character from entrepot to industrial powerhouse. China's increasing isolation from the West, which continued up to the early 1970s, almost ended Hong Kong's role as the trading ''gateway''. During the height of the Cold War, China was struggling with its own internal troubles. The political struggles of the 1960s' Cultural Revolution reached a climax in the period between 1966 and 1969. In 1966 and 1967, trouble spilled into Hong Kong. Trade with the West through Hong Kong continued to drop, but China remained Hong Kong's principal food supplier because its prices were low and the food was quickly and easily delivered. During this time, sanctions against importing manufactured goods from China and North Korea were still in force. As Hong Kong honoured the UN's embargo, its economy went through a metamorphosis: the territory developed into a manufacturer, and began exporting its own goods, mainly to the United States. China entered the 1970s with plans to ''reconstruct'' its economy. In 1972, US president Richard Nixon became the first American leader to visit China since the Communists took power - and began the Cold War ''thaw''. Mr Nixon's trip marked the resumption of normal relations between the US and China. In January 1976, premier Zhou Enlai set down four goals for China to reach before the year 2000. Known as the Four Modernisations, these were that China should ''accomplish the comprehensive modernisation of agriculture, industry, national defence and science and technology before the end of the century''. With the move came a commitment from Beijing to work towards a more open economy - the ''open-door'' policy. For Hong Kong, the Four Modernisations meant its ''triple roles in China trade'' would once again grow steadily. These roles are that the territory is a major investor in China; it acts as a trans-shipment centre for the mainland's exports; and provides a conference hub for traders from China and elsewhere to take advantage of its advanced telecommunications and transportation facilities. The Post reported in 1978 that Hong Kong's investment in mainland joint ventures grew sharply. Investors heavily backed export-oriented manufacturing industries. The report said Hong Kong's part in these ventures was always about 30 per cent, and for three to five years. Most businessmen preferred medium-sized investments, worth at most US$20 million. As China's economic growth began to accelerate, provinces were forced to compete against each other to win joint-venture agreements with Hong Kong businesses. The competition was tough, and Guangdong province, because it was closest to Hong Kong, attracted the most investments from the territory. In August 1980, the National People's Congress Standing Committee made Shenzhen, Zhuhai and Shantou each a Special Economic Zone, under the ''open-door'' policy. The zones were to concentrate on developing export-oriented industries and tourism - and China's fledgling market economy. A 1982 report said between 80 and 90 per cent of foreign investment in Shenzhen, which is north of Hong Kong, came from the territory and Macau. Once China was committed to a more open economy, Hong Kong could only benefit in its role as the mainland's complementary trading partner. Trade grew even after Britain and China started talks on the territory's future in September 1982. The Post reported in 1982 that Sino-Hong Kong trade was valued at HK$25 billion for the first seven months of the year. Since then, China has grown to become one of Hong Kong's top three export markets. China, thirsty for goods to help accelerate its modernisation programme, more than doubled its imports of telecommunications equipment from Hong Kong: it bought 144 per cent more in 1982 than in 1981. In the same period, it sold goods worth $18.2 billion to Hong Kong. Trade grew 19-fold from 1980 to 1988; economic ties grew accordingly. In October 1982, Hong Kong sent an economic mission to China, the first top-level business tour to the mainland since Sino-British talks started. In the mid-1980s, Hong Kong businessmen began to find attractive investments in China's inland provinces. Previously, their interest had been held only by ports. The Post carried many reports that Hong Kong was becoming more involved in joint ventures in the north. As a mark of Hong Kong's growing importance in the region, the Chief Secretary, Sir Philip Haddon-Cave, said on April 10, 1985, that if the territory was allowed to fulfil its ultimate destiny, it would become ''the regional capital city of the Far East'', serving the economies of the developing region. In 1988, a Post report estimated that more than 1,500 mainland firms were represented unofficially in Hong Kong. There were also 500 large companies representing organisations from state and provincial to municipal level and special areas. Sino-Hong Kong trade had many more challenges to face: one of Hong Kong's original trading giants, Jardine Matheson, moved its headquarters to Bermuda in 1984 amid heavy criticism. The move shook the confidence of other traders; Jardines was an active investor on the mainland. However, public criticism stopped after a report on July 13, 1984 - headlined ''Bermuda move no setback, Jardine's trade with China rises'' - appeared. At the same time, Hong Kong's manufacturing sector increasingly moved its production to China, where there was an abundance of labour and raw materials. In 1985, the Post reported that academics criticised industry for becoming dependent on China. Their concerns were backed: Hong Kong experienced a short slump as a result of a slowdown in the mainland's export growth. Then, Hong Kong's overall export figures suffered in mid-1986 when China cut its imports from the territory. In March 1986, the mainland announced a five-year economic plan that was intended to lure back and extend Hong Kong's investment in China and help it develop and change technologically. Mainland banks began to open offices in Hong Kong, another sign of China's growing influence on the territory's economy. A report on May 7, 1985, said the Bank of China was recorded to have tripled its assets in Hong Kong since 1979. Its plan to build a 72-storey tower in Central became a hot topic that year. In 1987, the Standard Chartered, one of Hong Kong's two note issuing banks, opened a branch in Zhuhai, Guangdong province. It was the first international bank to set up business in the special economic zone. But trade suffered again in the mid-1980s because of China's politics and its international trade disputes. In particular, United States' accusations that China had misused textile quotas by wrongly recording their origin and the mainland's growing protectionism, drew attention. The global stock market crash in 1987 weakened Sino-Hong Kong trade. The crash decreased the buying power of many of China's trading partners. It meant that Hong Kong lost trade revenue in both selling semi-manufactured goods to China that the mainland would in turn re-export to third countries, and exporting goods that it had bought from the mainland. More than 40 per cent of Hong Kong's export to the mainland was transferring materials for further production there. Trade staggered further in the late 1980s as corruption and business malpractice grew with the economic boom. Criticism about malpractice reached their highest point in 1988 - and even former Chinese Communist Party general secretary Zhao Ziyang's son was attacked. The Post headlined its report on October 6: ''Zhao's son an official profiteer''. A student outcry to urge the government to step up measures against corruption turned into a political crisis. Students demonstrated in Beijing's Tiananmen Square - and the government's response on June 4, 1989, drew anger from around the world. Trade sanctions were called for but little, if anything, was actually done. It was feared China's ''open door'' would slam shut. The US Congress threatened to withhold renewing China's Most-Favoured Nation trade status if the mainland did not address human rights issues. Without MFN in China, Hong Kong's investment in production facilities on the mainland would suffer, as would trade. The US threats prompted Hong Kong to organise groups to lobby Congress against attempts to remove China's MFN status. The territory also fought to have China re-accepted into the General Agreement on Tariffs and Trade (GATT). This year, the yuan's devaluation and Beijing's measures to cool China's overheating economy had a mixed impact on Hong Kong. A January 30 report said the devaluation affected local companies that relied on sales in China, but it helped those that used China for manufacturing for exports because they paid for labour and materials in local currency. Companies, such as the clothing manufacturer Goldlion that depended on the mainland market, expected up to a 22 per cent drop in earnings, a Hoare Govett Asia report said. But there is no consensus on how China's austerity drive will affect trade. Some economists said the measures would reduce China's imports and cause Hong Kong's sales to China to decline. Foreign investors would also withhold investing in China to see how the programme went. Yet a report on September 5 said the austerity measures would benefit Hong Kong. Mainland enterprises were more eager to lure foreign capital in view of the credit-tightening, it said.