AU.-Harney, Alexandra The couple from Shanghai preferred to pay in cash. Though the flat they wanted - part of a luxury development in northern Hong Kong - had not even been built yet, they handed over the HK375,000 (48,000) deposit on the spot.

The mainland Chinese, who helped inflate Hong Kong's property bubble in 1997, are back. Only this time it is not state enterprises buying corporate housing but businesspeople seeking second homes or investment properties.

"With 8 or 10 % GDP growth, a lot of people on the mainland, especially in cities, are better resourced to invest again, whether in Hong Kong's property market or the stock market," says Justin Chiu, an executive director at Cheung Kong Holdings, tycoon Li Ka-shing's flagship company.

While still small in financial terms - executives estimate purchases by mainlanders represent only 5 % of the market - this shift signals a new phase in the relationship between Hong Kong and China: one in which a fluid exchange of goods, services and people leads to a more unified economy and society. That combination, which is unique in history, has thrown up financial opportunities - but also political challenges.

It is not hard to see what has attracted Chinese investors' interest. Property prices are down more than 70 % from their 1997 peak, lowering the price of a mass-market flat from HK10,000 per square foot in 1997 to HK2,000. Mortgage rates, which were between 8 and 9 % six years ago, have come down to 2.5 %. Returns on rental flats, even at the bottom end of the market, can approach 8 %.

Beijing's decision to allow residents of cities in neighbouring Guangdong province, Beijing and Shanghai to visit Hong Kong as individuals rather than with a tour group has also made shopping for flats - and jewellery and clothing - easier.

Then there are the facilities. Hong Kong boasts better public transport and medical services than any city in China. "The standard of living is higher in Hong Kong than on the mainland," says Sandia Lau, director at Centaline, one of Hong Kong's largest property agents. "If you can live in Hong Kong, it?s proof of your success."

Indeed, Mr Chiu describes a Chinese client who bought a flat in a waterfront skyscraper, sparing no expense in its decoration. Now, he hardly uses it. "When his friends come to Hong Kong, he says, 'why don't you stay there?'. It's for social status."

But not all new buyers are interested in the upper end of the market. In one case prominently covered earlier this month, a mainland Chinese businessman paid HK2.64m for five government flats, each measuring only about 490 square feet.

Hong Kong's popularity with wealthy mainlanders has convinced some observers that it will one day become China's retirement community. "Hong Kong will be a Miami or Orlando," says Anthony Neoh, a prominent Hong Kong barrister.

Before then, however, China will need to resolve the legal issues raised by a more porous border. Under current regulations, mainland Chinese can bring no more than Rmb6,000 (725, ß660, GBP460) in cash across the border. Most investors skirt this regulation by setting up a company in the territory, getting friends or relatives to buy property on their behalf or by using a Hong Kong credit card. But there are concerns Hong Kong property could become an attractive vehicle for mainland Chinese to launder money.

Ambrose Lee, secretary for security, recently promised to catch those who violate the territory's tough anti-money laundering laws. This could be difficult: after almost five years of plunging prices and anaemic demand, estate agents admit they avoid asking detailed questions about Chinese customers? business for fear of scaring them off.

Beijing last week began to relax foreign exchange controls slightly to allow visitors to Hong Kong to spend more. Changes like these could not come soon enough for Hong Kong property agents and developers.

"Hong Kong people have the money to buy property, but not the confidence," says Ms Lau. "So they keep their money in the bank. If (mainland property buying) increases, it will motivate people and give them confidence."

Financial Times