(FORTUNE Magazine) – Soon to be wed, Shanghai and Hong Kong have always had a strange love-hate relationship. They are not quite competitors, but certainly not friends. When I first began reporting from China in 1948 as a 28-year-old reporter for Life magazine, Shanghai, China's brawling commercial capital, was by far the more important, while Hong Kong was a relative backwater, just stirring from its beginnings as an outpost for freebooters as well as legitimate traders. That was shortly before the Communists marched into Shanghai--signaling the death of capitalism in China.

Half a century later the two cities have traded places. Hong Kong's thriving capitalist economy is the eighth-largest trading power in the world, far surpassing its mainland rival. Shanghai, meanwhile, recovering from decades of neglect, is furiously striving to become an economic powerhouse again--and perhaps pull past its old rival one day.

Watching Hong Kong prepare for the handover, as its arranged marriage to the Communists is called, I am struck by the sharp contrast between the plans for this peaceful event and the way Shanghai was wrested away from the Nationalist forces by Mao's armies in May 1949. The midnight ceremony in Hong Kong on June 30 is to be lighted by dazzling fireworks and covered by a foreign media invasion some 6,000 strong. The pipes and drums of the Black Watch will be joined by the Band of the Scots Guards, the Highland Band, and the Gurkha Band. In a final symbolic gesture, Prince Charles will in effect give the bride away and then, together with her last British guardian, Governor Chris Patten, board the royal yacht Britannia and sail out of Hong Kong harbor. This extravaganza is being orchestrated like a glittering Hollywood spectacular and will be beamed by satellite to the four corners of the earth.

Shanghai, on the other hand, went through a series of violent last-minute convulsions preceding its surrender ("liberation," the Communists say). Suspected Communist agents and black-marketers, scapegoats of a collapsing economy, were given drumhead trials and then, with sirens wailing and the doomed men screaming for mercy, paraded around town in open trucks before being dumped in the street and shot, one by one, point-blank through the head.

The villas of the wealthy British taipans, clustered in the western outskirts, were burned down to clear a field of fire for the 155-mm howitzers, which in the end remained silent because the defending Nationalist soldiers, having no stomach to stand and fight, fled. And when the Communist troops finally moved down Nanjing Road, the city's main artery, they gawked at the fancy hotels and movie palaces. Most of them were peasant boys, clearly more amazed at Shanghai than Shanghai was at them.

At that time Hong Kong was already trying hard to usurp Shanghai's reputation as the economic center of the East. But it was a much quieter place. Populated by what now seems like a paltry 1.7 million people, it was a haven for British colonials who wanted the good life without working too hard. What made it such a magnet for foreigners was not just its deep, protected anchorage, high hills, and spacious views but the laissez-faire attitude of its government. From the early 19th century Hong Kong had been a handy oasis for opium traders, freewheeling entrepreneurs, and a few pirates as well.

Yet in the Orient's wild old days it could never match the excitement of Shanghai. In that seething city, it wasn't just the clash between East and West, rich and poor--barefoot rickshaw boys padding along beside sleek Rolls-Royces; starving beggars sprawled on the pavement outside elegant restaurants; the Bund's marble banks and modern offices towering over ramshackle shanties on the Huangpu River waterfront. It was the casual, everything's-for-sale attitude, inbred violence, and rampant corruption that set Shanghai apart.

After all, Shanghai, once alternately dubbed the "Paris of the East" and the "Whore of Asia," prided itself on the variety of vices it offered--from the gambling halls and opium dens of Nantao to the bars of Honkew, lined with smiling singsong girls and White Russian "hostesses." This was where an exasperated missionary once cried out, "If God lets Shanghai endure, He owes an apology to Sodom and Gomorrah." It was also the place that inspired Marlene Dietrich to rasp, "It took more than one man to change my name to Shanghai Lily." And it was where sailors got shanghaied right up until the Communists walked in.

Actually, Shanghai was several cities crammed into one. French Town accommodated Gallic transplants who gathered in the afternoon for an aperitif and tennis at the Cercle Sportif Francais. The International Settlement was populated by Brits, whose favorite sport after a few pink gins followed by tiffin (lunch) was a game of lawn bowls on the manicured greensward of their Sporting Club, and by a few Yank businessmen who tirelessly threw Yahtzee dice from a leather cup on the long mahogany bar at the American Club. An army of Austrian and Russian refugees rounded out the ranks of resident foreigners. The millions of Chinese were then confined primarily to Nantao.

Right up until the city fell, all the big companies belonged to foreigners. The British ran the waterworks, wharves, shipping, banks, and trolley cars, while the power plants and telephone and gas companies were owned and operated by Americans. However, at the end inflation had become so rampant that it took a shopping bag stuffed with $100,000 notes to pay for dinner. But many local people had no money at all, and starvation had become the city's scourge, a dire problem passed on to the Communists. I had an eerie feeling as I moved down to Hong Kong in 1949 that we were leaving Shanghai for dead.

When I returned for the first time in February 1973, that assessment still seemed correct. The city was dark, most of the flashy neon having been replaced by dim, flickering bulbs. The loud cacophony of traffic had gone too, giving way to the muffled whir of thousands of bicycle wheels. And while the Big Ben chimes atop the Customs House still sounded the hour, Red Guards had changed the chimes to play "The East Is Red," Communist China's national anthem. More telling, the sparsely stocked store shelves spoke of the disastrous Cultural Revolution. The center of Shanghai had not added one new building to its skyline, and many of the old ones appeared unoccupied. All the foreign banks and businesses, along with the taipans who ran them, had transferred their headquarters to Hong Kong. So had the wealthy Chinese.

This influx from Shanghai had stretched Hong Kong in 1973 to the breaking point--or so it seemed then--with four million people. Skyscrapers were sprouting like weeds along the waterfront, with rows of new high-rise apartments creeping up the hills behind them. The first tunnel had been hollowed out under the harbor, connecting Kowloon with Victoria, and a highway was being bored through the hills to provide a shortcut to the rich Repulse Bay community on the back side of the island. Hong Kong was growing so fast that even the staid, century-old Cricket Club had to be transplanted from the heart of the business district to a bare spot between two hills called Wongneichong Gap. Only the seedy Wanchai district of Suzy Wong fame looked the same, pulsating with topless bars filled with GIs on R&R from Vietnam.

Hong Kong today is yet another place. Real estate prices have shot so preposterously high that many big office buildings put up in the Seventies have been torn down and replaced by soaring steel-and-glass towers, 60, 70, and 80 stories high. Even the Hilton Hotel, which was restored at a cost of $20 million just two years ago, is gone. But then nothing is rooted here, except the pursuit of money. Perhaps that explains why Hong Kong's national flower, the bauhinia, which in deference to the Communists is already displacing Queen Elizabeth on all newly minted coins, is a sterile hybrid.

A few remnants of the old Hong Kong are left. The Peak Tram funicular continues to carry sightseers to the city's loftiest perch. Pea-green Star ferries still ply back and forth to Kowloon, though the trip is getting shorter all the time because landfills keep shrinking the width of the harbor. Spotless subway trains have lightened the load on the ferries as well as the crowds cramming into the creaky old double-decker British trolleys and buses. Even on those yesteryear conveyances, the chirping of cellular phones is confirmation that this is 1997.

Poised now to cede all of this to the Communists, how does Hong Kong feel? It depends entirely on whom you talk to. Kai-Yin Lo, a good friend who in recent years has become an internationally known jewelry designer, plans to keep her main residence and business headquarters in Hong Kong. "Otherwise," she says, "I wouldn't be studying so hard to perfect my Mandarin." Still, she's scared that Communist restrictions might prevent her from exporting her treasured Chinese possessions. "I've already shipped my antique furniture to the Singapore museum," she confides. "And my porcelain collection will soon be on its way to the Denver museum."

Many other Chinese friends, especially those who fled Shanghai in 1949, are similarly hedging their bets on the future by snapping up condos in Honolulu, Vancouver, or San Francisco. But most of the younger professionals are too immersed in their careers to consider moving. Professor Joseph Yu-shek Cheng, chairman of the Contemporary China Research Center at City University, says, "At 47, I'm part of the Hong Kong-born generation. We are proud to belong here, though the overcrowding has become oppressive." Eventually, however, he sees Hong Kong's border being pushed back many miles into the mainland in order to open up new housing and recreation areas.

Some token topographical adjustments, I discovered, have already been made. The British-sounding Chater and Argyle subway stations have been renamed Central and Mongkok. But as resident historian Arthur Hacker states, "Eradicating the trappings of Hong Kong's 156-year colonial past is not so simple." The statue of Queen Victoria, which lost an arm to the Japanese during World War II, recently suffered a broken nose at the hands of anti-British vandals. But Hacker wonders what's to become of Belcher Street (named after Captain Edward Belcher, who first raised the Union Jack at what's known as Possession Point), Pottinger Peak (named after the first governor), and many other roads, parks, and places that sound too, too British.

In a nod to their new rulers, a few Chinese members of Hong Kong's knighted gentry have already taken the precaution of removing the OBE or CBE from their calling cards. Not Sir Run Run Shaw, the Shanghai-born movie mogul who gave Bruce Lee and Jackie Chan their starts and has contributed $250 million to various cultural and civic organizations in both Hong Kong and his homeland. Still doing his daily qi gong meditative-breathing exercises at the age of 90, he told me, "In one life, I've prospered under Sun Yat-sen, Chiang Kai-shek, and the British, so I'm not worried about the Communists."

The transition may be easiest for the Hong Kong entrepreneurs who are already accustomed to the give-and-take required to get things done in China. William Wong Jr. is chairman of the architecture firm Wong Tung & Partners Ltd. He's been designing buildings for Shanghai since the early Eighties. "But we were premature," he says. "The people there didn't have the necessary business savvy to cooperate." He described making some 20 fruitless trips that all ended the same way. "We'd fly up, present our plans, then be kept waiting in a room for hours. Finally they'd say they liked our concept but were awarding the contract to a local firm." Yet Bill Wong's patience paid off. In 1989 his company finished the Jinjiang Tower, a 45-story hotel topped by Shanghai's first revolving restaurant. The architecture firm has three more major projects under way.

Speeding up the construction process is the company's new system of creating the designs in Hong Kong and then whisking the blueprints electronically to Shanghai. That timesaving innovation seems totally in keeping with the frenetic pace with which Shanghai is striving to regain its pre-Communist preeminence, fed by heavy capital infusions from Hong Kong, Taiwan, Singapore, and Japan.

No matter how many times you've been there before, landing in Shanghai today is like jumping into a caldron. The city is a nonstop assault on the senses: not just the impatient honking of a thousand gridlocked taxis on Nanjing Road, the deafening tattoo of jackhammers biting into bedrock, or the new crop of singsong girls populating hundreds of karaoke bars but also the capitalistic fever gripping almost every one of the city's 13 million citizens.

The most surprising sight for returning visitors is the forest of gleaming new office towers popping up out of Pudong. Shanghai has yet to fill those skyscraper shells, though--the present occupancy rate is running at around 15%. Shanghai's emerging capitalism, nevertheless, has some big boosters in Beijing's highest ranks. President Jiang Zemin and First Vice Premier Zu Rongji, who masterminded Pudong's development, are both former mayors of Shanghai. There is a joke circulating in China today that when Premier Li Peng came out of a Central Committee meeting, his associates asked him what had been discussed. "I don't know," he said. "They were all speaking Shanghai dialect."

Whether or not Shanghai ever supplants Hong Kong as the financial engine driving China, its residents are already on a spending spree. On Nanjing Road, a battle of the street signs has broken out between Coke and Pepsi, and appliance stores are bursting with VCRs, CD players, camcorders, and cell phones. Many slum dwellers, without water or electricity, have cell phones. "We were too conservative. We had no idea we'd be making so much money here," confided Domenico De Sole, Gucci's CEO, who flew over to open his glitzy new stores in Shanghai and Beijing. Watching the svelte Chinese models show off Gucci's wares, I was reminded how Mao Zedong's Great Leaps Forward all dismally failed, while Deng Xiaoping's leap into market socialism is hurtling ahead, practically out of control.

Shanghai's boom is attracting Americans by the 747-load, all champing to carve out markets for their companies back home. But as John Airola told me, they soon discover that doing business in this fast-growing city can take some unpleasant twists and turns. The general manager of Caterpillar's Shanghai Engine Co., Airola is also president of the American Chamber of Commerce, which he proudly points out has grown from 200 to 900 members in just three years. However, he also describes how Chinese "cultural differences"--the euphemism often used for lower ethical standards--can complicate business transactions. To avoid misunderstandings, he printed up a "Code of Business Conduct" booklet, which Caterpillar now gives to all its customers and suppliers. "It loses us some deals," Airola admits. "But sometimes, as the Chinese say, 'You have to kill the chicken to teach the monkey a lesson.' "

While Shanghai eagerly anticipates Hong Kong's "return to the motherland," some Americans are not so sanguine. "This," says Dean T.W. Ho, a Chinese-American businessman who's been operating out of Shanghai since 1985, "is the place where Nixon signed the historic Shanghai Communique, opening up relations with the Communists. But don't forget, that was 25 years ago, and China is still a police state."

What does China's undimmed desire for control mean for the future of its two economic powerhouses? Hong Kong's democracy advocate Martin Lee has repeatedly warned that "China's leaders will never trust Hong Kong." I agree. Although Deng Xiaoping promised "one country, two systems," China will probably end up as one country with one system. That outcome is likely to accelerate this next role reversal for these two Chinese cities. Why? For one thing, there is the matter of face, an often forgotten force in China. Hong Kong was built and run by colonials. So, for that matter, was the old Shanghai.

The new Shanghai, however, is being built by the Chinese themselves. And with foreign investment pouring in at the rate of $100 billion a year, Shanghai will have the wherewithal to finance its ambitions. That makes it hard to be pessimistic about this strongman's future. When I revisit Hong Kong and Shanghai in 2007--I hope on assignment for FORTUNE--I'll be surprised if the booming mainland metropolis hasn't regained its pre-Communist role as China's economic capital.