IT IS July 1st in Hong Kong. HMS Britannia has just sailed out into the South China Sea, taking away Britain's last governor. The territory has passed under Chinese sovereignty. A pro democracy group wants to hold a peaceful demonstration. But it is caught in a Catch 22 situation.

Under public order proposals put forward last week by Mr Tung Cheehwa, Hong's Kong's post colonial leader, and which will come into effect on July 1st, protesters need to give seven days' notice of plans to demonstrate. For the first week under new management, all demonstrations in Hong Kong will be illegal.

Thus an element of tension and the prospect of arrests will mark Hong Kong's tentative first hours as a Special Administrative Region (SAR) of the Republic of China. It is not even certain that pro democracy demonstrations will be allowed at all in future.

The proposals, published last week in a 36 page consultative document, have provoked widespread criticism. The EU and the US condemned them as a rolling back of civil liberties. The British administration challenged Tung Chee hwa's office to explain how it justified the amendments on the grounds of national security and public safety.

The dispute focuses attention on a key question for the future government of the territory. Is Mr Tung Chee hwa going to be an independent chief executive as promised by Beijing under its "one country, two systems formula", or is China going to exercise the real power behind the throne?

Hong Kong newspapers report that the Shanghai born shipping magnate is engaged in a feud with the office in Hong Kong of Xinhua, the official China news agency which has been Beijing's de facto mission in the territory. The incoming chief executive fears that if Xinhua succeeds in its request to the Chinese leadership to be left in Hong Kong to liaise between Beijing and the SAR, it will give the impression that it is pulling the strings.

As it is, Mr Tung has fully deferred to Beijing's wishes that restrictions be put on the exercise of freedoms brought in by Governor Chris Patten during the 1990s. That is what his proposals are designed to do. He has allowed a consultation period of three weeks. The weight he gives to critics will be a measure of his openness to Hong Kong rather than Chinese interests.

The measures bring Hong Kong back, in civil liberty terms, to the status quo before Mr Patten's amendments. A pro Beijing lawyer, Chow Charn ki, said the proposals were tighter than the pre 1992 Societies Ordinance and the pre 1995 Public Order Ordinance. These were amended in the aftermath of Tiananmen Square in 1989, when many democrats in Hong Kong feared their draconian, but little used, colonial powers would be turned against them when China took over.

China was angered at the time at what it saw as an attempt to dictate how Hong Kong should be run after 1997. The Patten amendments, and his 1992 extension of the franchise for the Legislative Assembly, were seen by Beijing as part of a broader plot to create trouble for China.

US support for the governor confirmed suspicions in Beijing "that the proposals were part of an international scheme to encourage Hong Kong to become more independent as a centre of democracy aimed at subverting the Chinese political system," as Michael Yahuda of the London School of Economics put it in his recent book Hong Kong, China's Challenge.

For the Chinese, wider issues are at stake. "China's paranoia about Hong Kong being used as a base for subversion ... colours the whole issue of the future of civil liberties in Hong Kong after July 1st," said commentator Margaret Ng in the South China Morning Post. Another observer noted that China would resent the way Britain was playing up to the US Congress, which has demanded that respect for civil liberties be given absolute priority in Hong Kong policy.

MR TUNG'S document points out that rights are not absolute and that the International Covenant on Civil and Political Rights to which Hong Kong subscribes allows some restriction of civil liberties. But it does not convincingly tackle the question: why are they necessary?

The paper cites recent occasions "when protesters intruded into a foreign consulate (the Japanese)" and "when demonstrators blocked the traffic in the heart of the business centre". Critics say such incidents can be adequately dealt with under existing law and that more than 1,000 demonstrations in the last can be adequately dealt with under existing law and that more than 1,000 demonstrations in the last year passed off without serious incident.

Paragraph 4.4 of the document says: "We must also take steps to prevent Hong Kong from being used for political activities against China," adding "this has been a long standing policy of the Hong Kong government.

This will be open to wide interpretation. Will a campaign against human rights abuses in China be considered anti Chinese? (That's how Beijing labelled the Danish UN resolution criticising its human rights record). Will political activities against China include the June 4th demonstrations in Hong Kong to commemorate the crushing of the pro democracy movement in Tiananmen Square?

There has also been scathing comment about the euphemistic language designed to avoid the words ban and licence in the document. Demonstrators will have to ask for a "notice of no objections" from the police. A Hong Kong newspaper asked: "Are we going to call a liquor licence a certificate of no objection to selling alcoholic beverages'?"

Also unclear is what is meant by the registration of societies, and the warning they will be banned for accepting foreign assistance. Societies can be refused registration in the SAR "in the interests of national security or public safety, public order, the protection of public health or morals, or the protection of the rights and freedoms of others."

The 80 or so religious organisations in the territory with their worldwide organisational and financial ties are fearful of the implications. "We are gravely concerned," said a member of a leading Roman Catholic society. "If they want to get rid of us, that would be a way of doing it."

It is evident from such remarks that the proposals have created a climate of uncertainty in some levels of Hong Kong society. But at the same time the Chinese are doing a lot to ensure that confidence in the territory's ability to continue its capitalist ways remains undiminished.

The Chinese Communist Party and the State Council have sent circulars to ministries and provincial governments instructing officials to respect Hong Kong's high degree of autonomy. People's Liberation Army units will be deployed near the SAR's borders to ensure that there is no mass movement of Chinese into the territory after July 1st. The Chinese media have been running special articles emphasising there is no alternative to allowing Hong Kong retain its capitalist system.

It is very much in China's interests to live up to its promises and not to endanger Hong Kong's fragile identity in what is a transfer of power without precedent in the world. A smooth transition will be a major test for the post Deng Xiaoping leadership.

A mishandled job will raise big questions about the Communist Party's ability to run China's affairs. It would also scuttle Beijing's policy for peaceful unity with Taiwan - the one country two systems idea which was thought up by Deng Xiaoping to deal with Taiwan in the first place.

But on the issue of civil liberties, Beijing has clearly calculated that it must have sufficient control to prevent Hong Kong becoming a destabilising force within China itself.