On a teeming street in the gritty Hong Kong neighborhood of Mong- kok, vendors peddle everything from driving lessons to cable-TV subscriptions to Citibank accounts ("and get a free cordless phone!"). These days there's more on offer, too. A gaggle of pro-democracy street performers entertain passersby with a pantomime. Next to them, a man sitting inside a giant metal bird cage--painted pink, with a red hammer and sickle on top--protests Beijing's efforts to keep the island's political aspirations penned up. Nearby, Democratic Party member Gary Fan is raising money for his planned campaign for a seat in the Legislative Council, or Legco, the closest thing Hong Kong has to a Parliament. A district councilor, Fan is enthused by what he sees as a new political energy in one of the world's most money-obsessed cities. "More and more young people have become politically aware in the past year," he says. "They're joining rallies, they're encouraging people to register to vote. Five or 10 years from now, they'll make a real difference."

Perhaps even sooner. Down the street, members of the Civil Human Rights Front sell books, T shirts, stickers and postcards--and urge people to join a protest on July 1, the seventh anniversary of Hong Kong's return to Chinese sovereignty. A similar demonstration last year attracted at least 500,000 people. "It was a great moment for Hong Kong," says Rose Wu, one of the organizers. This week's rally is expected to draw up to 300,000, and Wu argues that a decent turnout is crucial, because it will help determine if Hong Kong residents want a more forceful voice in their political future--"or a culture of fear when dealing with Beijing."

For decades the conventional wisdom was that Hong Kong was almost solely a commercial city--the politics could be left to Taiwan, thanks. Some analysts even tried to explain away last year's massive rally as more a reaction to Hong Kong's moribund economy, and the public-health panic over SARS, than the dawning of a new political era. Not true. Today, in defiance of a Beijing ruling in April, many Hong Kong citizens are asking for something they've never had before--universal elections. And led by a savvy new generation of activists, they're digging in for a long, hard struggle with the mainland's conservative elite and their proxies in Hong Kong. "People have to keep coming back, year after year, until we get [direct elections]," says lawyer Audrey Eu, one of the democratic movement's new leaders and a first-time Legco member. "Hong Kong will never have universal suffrage until you stand up for it."

For much of this year, the political debate has been polarized. Mainland officials have called the democrats "traitors," accused some of fomenting separatism and warned that only "patriots" were qualified to run Hong Kong. Beijing frets that unrest could not only sabotage Hong Kong's economy, but infect the mainland and ruin any chance of rapprochement with Taipei. In April China's National People's Congress thus unexpectedly "reinterpreted" the Basic Law, Hong Kong's mini-Constitution, in a way that dashed democracy activists' hopes for universal suffrage in 2007 and 2008, the earliest that direct elections could have been introduced for the Chief Executive and Legco, respectively. "It showed that Beijing wanted to control the process, not just at the end but from the very beginning," says political commentator Frank Ching.

Political tensions escalated even further in May, when three popular and outspoken radio talk-show hosts mysteriously quit after rumors of Beijing pressure. Meanwhile, the June 4 candlelight vigil marking the anniversary of Beijing's Tiananmen crackdown drew more than 80,000 demonstrators, twice as many as last year's. While residents are angry at Beijing and its yes-men, they're also worried by what they see as the Democratic Party's confrontational stance; an internal DP study says its public support has dropped about 10 percent.

More recently, however, there's been a thaw of sorts. Last week Chinese Vice President Zeng Qinghong, Beijing's point man on Hong Kong affairs, suggested the central --government would enhance dialogue with Hong Kong's democrats, adding: "We need to stand united." Then Democratic Party founder Martin Lee spearheaded a nonbinding good-will resolution in Legco that called on Hong Kong and Beijing to unite behind the "one country, two systems" formula that was supposed to ensure the enclave's autonomy after 1997. Just because many Hong Kongers support democracy, Lee said, doesn't necessarily mean "we and Beijing should be like fire and water."

Wary Hong Kong citizens aren't sure whether the warming is real or cosmetic. Pro-democracy stalwarts themselves have recently disagreed over tactics. They're confronting the so-called Patten dilemma. Britain's last colonial governor, the combative Chris Patten, famously observed that Hong Kong people "want me to stand up to Beijing--but don't want me to fight with Beijing." Many local democrats are also seeking to walk that fine line, not knowing where it leads.

The answer may not be apparent until Legco elections this September. Hong Kong's democrats, who now hold 19 of the body's 60 seats, are expected to add to that number. They may not attain their holy grail--a majority--but they have succeeded in raising the stakes in their political tussle with Beijing and with its proxy, Hong Kong Chief Executive Tung Chee-hwa. DP volunteers are selling T shirts for HK$30.50 (a little less than $4) symbolizing their aim to snare just over 30 Legco seats. Their message resonates with young residents angered by what they see as Tung's incompetence. "The government pisses us off," says Tiffany Ho, 28, who paused during a stroll in Mongkok to buy matching T shirts for herself and her boyfriend. They'll wear them to this week's July 1 demonstration. "We're just little people, so this is the only thing we can do [to] show we're not pleased."

New political talent has helped the democrats regain momentum. Eu and museum curator Andrew Lam, who's a complete political novice, have joined veterans like Martin Lee to galvanize a movement that until last year seemed to be stagnating. Lee, a lawyer, has been the Democratic Party's poster boy for two decades. An attractive and successful barrister, Eu claims that in 2000, when a Legco by-election gave her the unexpected chance to enter politics, "I didn't feel like a politician at all--and I still don't."

That partly explains her appeal. Old-style politicians are viewed with suspicion by Hong Kong's cynical citizens. (Less than 1 percent of the population claims any party affiliation at all, and the Democratic Party has only 600 members.) Eu says she's always believed in democracy, human rights and the rule of law. But in the past, she'd "left the battle to others while I focused on making good money in my job." Now she's one of Hong Kong's most popular politicians.

Hong Kong's tycoons, bankers and managers have by no means turned their backs on making money in order to embrace politics. In a recent University of Hong Kong survey, 73 percent of the respondents said economic affairs should be the top priority for legislators elected in September. Increasingly, however, governance, official budgets and even public health are seen in a harsh political light. During the SARS crisis, for example, when hospitals ran out of protective gear, the community lambasted Tung--then bought face masks themselves to donate to medical personnel.

In mid-June Hong Kong's chief Secretary, Donald Tsang, raised eyebrows when he declared that the business community "needs to engage the political parties." In the past, the business approach to politics tended to be "reactive, conservative and behind the scenes," says Tsang. But now, he adds, it's "time for business to step up to the plate." His message: Hong Kong's tycoons should openly convey their political views, not rely on traditional closed-door dealings. It was a "complete turnaround," says pro-democracy legislator Emily Lau. "Government never encouraged business to get political before."

Last year's July 1 protest, which was organized to fight a proposed anti-subversion law, unleashed an immense sense of civic empowerment. Stunned by the turnout, Tung's administration shelved the legislation. "I took part in the protest last year even though I didn't believe it could change anything," says college student-union leader Stanley Liu, 21. "And then it worked." The rally also pushed Beijing to grant Hong Kong firms preferential treatment on the mainland, and made it easier for Chinese mainlanders to visit Hong Kong as individual tourists. Now 30,000 arrive each day, spending an average of $600 per trip. Liu, a freshman at Hong Kong's Shue Yan College, is preparing to protest this July 1 as well. "Maybe we can force the government to give a timetable for universal suffrage, say, in 2007 or 2012," he says.

The democrats are not the only ones demonstrating a new political purpose. Even the stodgy pro-Beijing DAB party, which claims 2,000 members, is seeking a new image. After a dismal showing in the November 2003 elections for district council seats, it's been promoting younger, better-educated personalities such as chairman Ma Lik, who's praised the new surge in political activism. Last year's July 1 turnout was a call for better governance and accountability, Ma says. "Hong Kong's political paradigm is shifting, and it's doing so for the better."

Hong Kong has long been known as a city of survivors, able to ride out the region's perennial boom-and-bust business cycles. A similar resilience is helping some residents manage the enclave's political roller coaster. In May many believed radio talk-show host Allen Lee quit his job in fear, after receiving a cryptic phone call from a retired mainland official who pointedly asked after Lee's wife and daughter. But now he insists that "there was no threat." Not entirely convincingly, he says he resigned to escape incessant phone calls and criticism of views expressed on his popular show. Lee predicts that after the September elections, Beijing will launch a conciliatory campaign, possibly allowing visits by 20 or so Hong Kong democrats currently barred from setting foot on the mainland. "I'm more optimistic now than I was six months ago," he says. "Dialogue is starting, and both camps realize that confrontation is damaging." He's even contemplating a talk-show comeback, though not on the same program. One possibility is hosting a five-day special for Hong Kong Cable TV on--what else?--the Legco elections.