Thatcher walked out of a meeting with Deng in a daze. My guess is that Deng told her she could hand it back, or China would take it by force. Hong Kong isn't defensible against Chinese attack without a superhuman logistical effort and a huge manpower commitment. Let's say Britain wins. What has it gotten? A city in ruins. And at what cost? Hongkongers believed then and apparently believe now that they would be better off as a Crown Colony. But China isn't Argentina, and Hong Kong isn't the Falklands, separated from the mainland by 400 miles of open water.
I heard a story from a Chinese tourguide. According to the story, Deng said that by the letter of the contract (and it was a forced one at that), the UK could hold Hong Kong in perpetuity. Then he said, “Do you know what ‘Hong Kong’ means in Chinese?” “It means fragrant harbor.” “We have no contract specifying that we supply fresh water or other utilities to Hong Kong. How long do you think it will stay fragrant.”
Just a story I heard.