(FORTUNE Magazine) – They say that Hong Kong is run by the Jockey Club, the Hongkong Bank, and the governor--in that order. Now the governor is on his way out, and the colonial bastion of "The Bank" is ceding influence to the People's Bank of China as Britain's rule draws to a close. But the astonishingly powerful Jockey Club looks likely to keep thriving under the territory's new Communist masters. The club, which has long held a lucrative monopoly on gambling in the colony and owns two of the world's most high-tech horse tracks, is one of the two largest businesses in Hong Kong, second only to the mighty trading house Jardine Matheson. If it were ranked in the Fortune 500, the Jockey Club would edge out Weyerhaeuser as No. 103, with an astonishing $10.4 billion in annual betting revenues. By comparison, all the thoroughbred racetracks in the U.S. combined take in just over $12 billion--and there are 167 of them.

But the nonprofit Jockey Club is hardly a traditional business. It is also the territory's most prestigious social club and a charity so massive that it takes on such government functions as providing parks, universities, and medical facilities. To try to fathom just how much a daily part of life the Jockey Club is in Hong Kong, imagine the NBA, NFL, and National League rolled into one. Then add the United Way, the Social Register, and the Department of Parks and Recreation. Or just consider that taxes on the club's activities account for up to 10% of government revenues, and that without them, Hong Kong's refreshingly low 16.5% corporate tax rate might have to rise to about 20%.

The Jockey Club's success so far has been built on being at once the most British and the most Chinese of institutions, melding England's horsy sentiments and clubby notions of social order with the insatiable gambling appetites and love of face-enhancing institutions of the Chinese.

But the British influence in horseracing, as in everything else here, is fading fast ahead of Beijing's takeover on July 1, 1997. The Hong Kong Jockey Club in July discreetly excised the word "Royal" from its name. And the club is now under the management of an ethnic Chinese for the first time in its 112-year history as Hong Kong's last racing season as a British colony begins.

From September to June, the rhythm of the city's workweek and traffic patterns revolve around the Jockey Club's schedule. In a place as dense and tense as this, its twice-a-week horseraces provide an essential release valve as one of the few cheap, easy-to-reach recreational activities--indeed, as one of the few places where you can even smell real grass. More than a million people in Hong Kong place $215 million in bets each race day, usually after studying one of 25 daily newspapers dedicated solely to racing. About 46,000 people show up at the tracks on a typical day, and far more bet at the 126 off-track betting centers that dot even the remote islands of the territory. Roughly 650,000 people in this city of 6.2 million maintain telephone betting accounts, so they can wager from anywhere their cell phones will work. Another 62,000 rent dedicated hand-held computers to retrieve up-to-the-second odds and place bets via modem from anywhere in the world.

A day at the races is a chance to watch the way the Jockey Club brings the wildly disparate strata of Hong Kong society together around a single passion. At the plush Sha Tin racecourse, a human river pours out of trains and through overhead tubes straight into the grandstands; members, who have joined the club through their connections to its inner circle of notables, alight from their Bentleys at the covered doorway and glide up an escalator to their boxes. Fences separate the members' outdoor seating and carpeted, air-conditioned boxes from the bleachers where the masses sit. But their proximity is as striking as their separateness: Shipping magnates and barristers, bartenders and clerks are all shouting their lungs out for the horse of their dreams. With jackpots of as much as $5.9 million for a $1.30 bet, ordinary folks can dream that they, too, may one day pass through the gates into the members' enclosure.

At the top of the pecking order are the "stewards," or board of directors of the club--always 12 of the most influential men in the territory, often including supreme court justices, senior government officials, and top tycoons. Once dominated by the local British elite, the board of stewards is now mostly ethnic Chinese, and will likely see an increasing infusion of dignitaries from the mainland. It was taken as an early nod to Beijing when members in 1994 elected steward Larry Yung, the chairman of Citic Pacific, the Hong Kong arm of China's powerful investment conglomerate, and son of Rong Yiren, China's vice president. (Yung's horse Mr. Vitality was named Horse of the Year last season.) Steward Andrew K.N. Li, a senior adviser to Governor Christopher Patten, says that in localizing its leadership and building ties to China the Jockey Club is "like any forward-looking corporation or institution in Hong Kong."

Earlier this year the club replaced the latest in a succession of ramrod-straight retired British generals who have run the club with its first ethnic Chinese chief executive--Larry Wong, an automotive engineer and 31-year veteran of Ford Motor Co. who, in the words of one club member, "doesn't know how many legs a horse has." But stewards say they were looking for horse sense, not horsiness--a person who could run the club like a business. When he was recruited, Wong was heading up Ford's $1.7 billion subsidiary in Taiwan, after decades spent in the U.S. After he got the call about the Jockey Club, says Wong, "I laughed. I said, 'Nah, why would I want to be associated with that?' " To Wong, who had never been to the races in Hong Kong, horseracing meant the seedy Detroit racetrack.

But once he learned just how respectable--and huge--an enterprise the Jockey Club was, he changed his mind. Now Wong's task is to shepherd a giant, tradition-bound monopoly into a new era. Born in China, raised in Hong Kong just a stone's throw from the Happy Valley racetrack, educated in Taiwan and at Michigan State, Wong speaks Cantonese, Mandarin, Hokkien, and American-accented English. The stable boys like being able to chat with the boss in Chinese. But to some local Brits, Wong's corporate-American ways are a little unsettling. "What's all this about 'the product' and 'marketing'?" sniffs a British racehorse owner, who says things were different when "our generals" were in charge. For his part, Wong is pleased he's finally getting his managers to call gamblers "customers" rather than "punters." Says he: "The club has got a very long heritage and traditions, and some are very good, but some probably could stand some change. It will take time to adjust. I will have to adjust. Gradually both sides will have to adjust."

The biggest adjustment for Wong and for the stewards will be managing the club's relations with China. Wong says he plans to continue efforts to make friends across the border. Jockey Club managers recently traveled to Beijing's Tsing Hua University for a week-long training course in Chinese law, geography, politics, and economics. The club helped design Guangzhou's three-year-old racetrack and is advising Beijing on developing its lotteries. Betting in China has been illegal since the communist takeover in 1949, but the Guangzhou Jockey Club has experimented with wagering on horseracing under the name "intelligence games," with merchandise and cash prizes. Mainland horse trainers and riders regularly visit the stables at the Hong Kong club's Beas River country club for educational exchanges. And over the summer the club sent 24 retired racehorses to Shanghai as a gift.

Still, the $10 billion question nags: What will China do with this most golden of Hong Kong gooses? It's unlikely that China would try to nationalize the Jockey Club or attempt to shut it down. But Beijing may want to raise the betting tax to put more of the racing surplus under its control. Already the club has put its $414 million of charitable funds into a separate, tax-free trust, some of it invested offshore, to keep them out of reach of any money-hungry future government. The biggest worry is that mainland-style corruption will infiltrate racing. All the club can promise is vigilance.

So far, the Jockey Club's quiet diplomacy appears to be paying off. Beijing has, for example, appointed at least ten prominent Jockey Club members, including property tycoons Li Ka-Shing and Lee Shau-Kee, to the Preparatory Committee advising China on the handover next year. And although gambling is officially a capitalist evil, senior Chinese officials are fond of attending the races and of reassuring Hong Kong people that "horseracing and dancing will continue in Hong Kong" after the takeover--often attributing that comment to Deng Xiaoping himself. The Jockey Club believes in this promise: In the past two years it has plunked down $300 million to refurbish its Happy Valley racetrack and to build a gleaming new headquarters.

It just may be that in an era of tremendous change in Hong Kong over the next few years the Jockey Club will be one of the rare institutions that stays the same. After all, in many ways the Jockey Club--plutocratic, undemocratic, dedicated to the good of the people--seems just the kind of institution that China's aging Communist Party oligarchs ought to feel comfortable with. And what more could Beijing ask from horseracing than that it keep the masses content and the government's coffers full?

REPORTER ASSOCIATES Sheree R. Curry and Edward A. Robinson