The reasons why KWC came to by are a bit complicated. Essentially, the mainland Chinese garrison sited there was granted an exemption to the UK's 99-year lease,

The reasons why KWC came to by are a bit complicated. Essentially, the mainland Chinese garrison sited there was granted an exemption to the UK's 99-year lease, which means that Britain and its Hong Kong agents did not have authority over the city. A fuller history is here: http://www.tofu-magazine.net/newVersion/pages/KWC.html http://www.tofu-magazine.net/newVersion/pages/KWC.html "At the Convention of Peking on the 9th June 1898 Britain obtained the New Territories under a ninety-nine-year lease. There was one exception, Chinese officials could remain in the Walled City, as long as it was not inconsistent with the military requirements of the defence of Hong Kong This was of no consequence to the British — until the following year when local peasants rebelled, and attacked colonial traders in the new region. The then Governor of Hong Kong, Sir Henry Blake, asked the Viceroy of Canton for protection and requested the Chinese customs post in the Kowloon Walled City be closed down. The viceroy sent in 600 troops, half of which, unbeknown to Blake, moved into the Walled City. Deadlines for their removal were not met. Their presence was deemed inconsistent to the military requirements of the defence of Hong Kong and British troops were sent in to remove them. This military intervention would set the stage for eighty years of political argument, and claims and counterclaims over actual jurisdiction. In the meantime the population of the Walled City continued to grow, all but ungoverned and outlawed becoming, in effect, the tiniest city-state in the world. Theoretically controlled by the British, technically owned by China, and actually governed by whoever wielded power within such an anarchistic enclave — invariably gangsters. Throughout the rest of the City’s history various confrontations have taken place. The Japanese, who occupied Hong Kong from 1942-45, must have feared whatever lay within the Walled City’s murky interior, and attempted to dismantle it. They achieved little, except pulling down the old exterior garrison wall. In 1947 the British tried to demolish the now wall-less walled City and build a park. The Chinese rejected this, claiming it remained the official residence for their representative. In 1948 the British did evict 2,000 squatters from the surrounding area and demolished their huts — the rioting that followed ensured they didn’t try any more colonial re-development in the area. 1966 saw the Cultural Revolution in China and the communist flag was briefly raised in the city. Official attempts to remove it were met with more rioting. British policy came to regard Walled City as something of a hornets nest — best not to be kicked unless absolutely necessary."