Hong Kong's territory was acquired from three separate treaties: the Treaty of Nanking in 1842, the Treaty of Beijing in 1860, and The Convention for the Extension of Hong Kong Territory in 1898, which gave the UK the control of Hong Kong Island, Kowloon (area south of Boundary Street), and the New Territories (area north of Boundary Street and south of the Shenzhen River, and outlying islands), respectively. Although Hong Kong Island and Kowloon had been ceded to the United Kingdom in perpetuity, the control on the New Territories was a 99-year lease. The finite nature of the 99-year lease did not hinder Hong Kong's development as the New Territories were combined as a part of Hong Kong. By 1997, it was impractical to separate the three territories and only return the New Territories. In addition, with the scarcity of land and natural resources in Hong Kong Island and Kowloon, the New Territories were being developed with large-scale infrastructures and other developments, with the break-even day lying well past 30 June 1997. Thus, the status of the New Territories after the expiry of the 99-year lease became important for Hong Kong's economic development.

In March 1979, the Governor of Hong Kong Murray MacLehose paid his first official visit to the People's Republic of China (PRC), taking the initiative to raise the question of Hong Kong's sovereignty with Deng Xiaoping. Without clarifying and establishing the official position of the PRC government, the arranging of real estate leases and loans agreements in Hong Kong within the next 18 years would be rather difficult. In fact, as early as the mid-1970s, Hong Kong had faced additional risks raising loans for large scale infrastructure projects such as its MTR system and a new airport. Caught unprepared, Deng asserted the necessity of Hong Kong's return to China, upon which Hong Kong would be given special status by the PRC government.

MacLehose's visit to the PRC raised the curtain on the issue of Hong Kong's sovereignty: Britain was made very much aware of the PRC's aspiration to resume sovereignty over Hong Kong and began to make arrangements accordingly to ensure the sustenance of her interests within the territory, as well as initiating the creation of a withdrawal plan in case of emergency.

Three years later, Deng received the former British Prime Minister Edward Heath. Heath had been dispatched as the special envoy of Prime Minister Margaret Thatcher to establish an understanding of the PRC's view with regards to the question of Hong Kong. Throughout their meeting, Deng stated clearly for the first time the PRC's willingness to settle the sovereignty issue with Britain through formal negotiations.

In the same year, Edward Youde, who succeeded MacLehose as the 26th Governor of Hong Kong, led a delegation of five Executive Councillors to London, including Chung Sze Yuen, Lydia Dunn, and Roger Lobo. Chung presented their position on the sovereignty of Hong Kong to Thatcher, encouraging her to take into consideration the interests of the native Hong Kong population in her upcoming visit to China.

In light of the increasing openness of the PRC government and economic reforms on the mainland, then-British Prime Minister Margaret Thatcher sought the PRC's agreement to a continued British presence in the territory. However, the PRC took a contrary position: not only did the PRC wish for the New Territories, on lease until 1997, to be placed under the PRC's jurisdiction, it also refused to recognise the "unfair and unequal treaties" under which Hong Kong Island and Kowloon had been ceded to Britain in perpetuity. Consequently, the PRC recognised only the British administration in Hong Kong, but not British sovereignty.