The Portugese enclave of Macao is situated on the South China coast, at the mouth of the Pearl river. It comprises a small area of mainland and two nearby islands, linked to the mainland by bridge and causeway. A subtropical climate brings high humidity and the possibility of typhoons sweeping in from the South China Sea.

Macao is scheduled to become a Special Administrative Region of China in 1999. In contrast to the problems experienced by the British in Hong Kong, preparations for Chinese sovereignty in historically more compliant Macao have been relatively smooth. Macanese resident before 1981 have been offered Portuguese passports. However, the future status of mixed-blood Macanese is uncertain and tensions exist between the skilled elite and the merchants who support China's takeover. In legislative elections in 1992, pro-China candidates secured half of the directly elected seats in the 23-seat assembly. The last legislative elections under Portuguese rule took place in 1996.

While Hong Kong, just 27 km (17 miles) to the east, has built an advanced capitalist economy, Macao has been characterized by stagnation, corruption and bureaucratic inefficiency. It continues to rely on gambling – its casinos luring hundreds of thousands of visitors a year – and the economy is increasingly coming under Chinese control. An early 1990s property boom, fuelled by Chinese capital, collapsed and produced a liquidity crisis. Macao is now a major exporter of cheap, finished goods. Its factories use cheap Chinese labor to produce anything from fireworks to artificial flowers. A new international airport, a joint Sino-Portuguese project which came into use in 1996, offers the prospect of economic development.