Beijing is in the middle of a major architectural upheaval. While the city's past belongs to the Forbidden City's red stamped-earth walls, the few hutongs that remain, the boxy, imposing Sino-Soviet-style buildings of the 1960s and '70s and the tile-roofed "Chinese hat" buildings mandated through the 1990s, its present belongs to erector sets and concrete forms and its future to luminous glass and steel creations that arc and angle in unexpected directions, such as the new China Central TV headquarters building and the National Theatre building behind the Great Hall of the People, nicknamed the "alien egg".

The change is not simply physical. Day by day, Beijing is noisily and messily morphing into a more modern capital in both outlook and appearance.

"It's becoming a metropolis," says Vlad Reyes, general manager of the Hilton Hotel in Beijing. Although that may sound like an odd statement to make about a city of 15 million people, there is a certain logic to it. Beijing's population has nearly doubled in the last 12 years, with double-digit economic growth throughout, and the explosion has brought the city a renewed energy and optimism.

"In the mid-nineties movement was still restricted," says Reyes. "The streets were all bicycles and there were very few cars." Today, cars are an all too common sight on Beijing's streets (see box: Exhausted: Beijing's traffic dilemma) and restrictions on movement around the city and residence in certain areas are long gone. "Now, culture, international shows and exhibits are flourishing and becoming more sophisticated," he says. "Art museums here are rivaling the ones in Paris and New York."

Home to the throne

Beijing's prosperity means that it is no longer a cheap place to do business. According to a recent global cost-of-living survey by human resources firm Mercer - which tends to focus on the type of living costs primarily borne by the expat set - Beijing overtook Shanghai in 2006 to become the mainland's most expensive city, good enough for 14th on the worldwide list.

The 2008 Olympics, only two years away now, have been an important driver of the city's development - and mood - since the low point of the SARS scare in 2003, but they are certainly not the only game in town. "At the end of the day, it's the accession to the WTO - Chinese and foreign businesses - that has really sparked all this growth," says Reyes, pointing to the fact that mainland Chinese business travellers - a relatively insignificant group in the five-star hotel industry as recently as five years ago - now make up the majority of his hotel's guests.

As home to the imperial throne for nearly seven centuries, Beijing was never much of a business town. Up until its reinstatement as the national capital after the Communists defeated the Nationalists in 1949, Beijing's commercial importance in the country paled in comparison to that of its thriving next-door neighbour Tianjin, which served as its trading port and north China's financial centre. Upon the opening up and reform of the late 1970s and 1980s, however, Beijing became the place where outsiders enticed by China's business potential invariably pitched their tents.

During the 1990s, which saw the renaissance of Shanghai and the inception of the Shanghai and Shenzhen stock exchanges (a third exchange, to be built in Beijing, was proposed and rejected), businesses were drawn away from the capital, though it stayed - and remains today - the necessary starting point for businesses in need of any regulatory assistance.

Beijing is China's political, not financial, centre by policy directive, but, given the close relationship between politics and China's banks - the "Big Four" state-owned banks' directors remain government appointees, for instance - one can be forgiven for not seeing the distinction so clearly. Each of the Big Four - Bank of China, Industrial and Commercial Bank of China, China Construction Bank and Agricultural Bank of China - all have their headquarters here, either on or in the vicinity of Financial Street. The city's own mayor, Wang Qishan, first rose to prominence as the chairman of China's first investment bank joint venture, China International Capital Corporation (CICC), in partnership with Morgan Stanley, during the 1990s.

A tale of two governments

"Beijing's got that state-owned orientation - it's definitely a government town," says Alex McKinnon of New Zealand-based private equity firm Mahon China. Indeed, most of the major state-owned enterprises, from China National Offshore Oil Corp (CNOOC) and Sinopec to China Telecom. Both of the governments housed here - the Beijing municipal government and the national government - play important roles in the city's economic fate.

As the national capital, Beijing can rise above the regionalism that tends to define even the largest commercial centres like Shanghai, Guangzhou or Shenzhen, each tied to their respective economic regions, the Yangtze and Pearl River Deltas, according to McKinnon. "Being from Shanghai or Guangdong seems to raise certain animosities that don't arise from being in Beijing," he says. "If you're in Beijing, you don't get judged as being so regional. It's the capital, so it provides more of a national focus." Big business all across China inevitably must find its way to Beijing. Foreign investments anywhere in the country in excess of US$100 million require central, not just local, regulatory approval. That ceiling has risen in recent years - it used to be US$30 million - though that may be as much a sign that the deals are getting bigger as of a loosening of central control.

The municipal government behaves in essentially the same fashion as the governments of Shanghai or Tianjin with respect to its own economic zones and tax policies. Though its operations are separate from those of the national government, their paths occasionally intersect: the recent Capital Land scandal that led to the sacking of Vice Mayor Liu Zhihua and two other senior city officials was followed by reports that President Hu Jintao would be personally overseeing the corruption investigation. Liu, the official in charge of Beijing's entire US$40 billion worth of Olympic-related construction, was alleged by a foreign businessman to have taken a bribe in return for furthering a land development opportunity.

The swift reaction to the first whiffs of impropriety surrounding the Olympic build-up - Liu was quickly dismissed for "corruption and dissoluteness" before being charged with a crime - underscored Beijing's most pressing priority: making sure the Olympics go off without a hitch.

"Everyone here, from young kids to old people - they're all excited," says Leon Guan, owner of Leon Productions, an event-planning company in Beijing.

Though generally optimistic about the prospect of the Games, the Hilton's Reyes notes that expectations have a way of spiralling out of control. "Just remember, the Olympics are going to be over after a two-week period," he says. "The organizers are already telling some of the three- and four-star hotels not to expect too much, because so far everyone is jacking up their prices, thinking that they'll all be booked solid." With the dramatic increase in star-rated hotels in store (see box: A sprint to the finish line: the pre-2008 building rush), occupancy levels are bound to drop before picking up again.

A third diplomatic area is being built in the burgeoning Chaoyang District between the northeastern sections of Beijing's second and third ring roads. Israel, Malaysia and Brunei have all built new embassies; the United States and South Korea will soon move into larger compounds in the area, followed by India and France.

Nice Olympics. Now what?

Beijing is pouring so much energy and anticipation into a 15-day period in August 2008 that one scarcely hears about anything beyond that fortnight.

International tourism looks sure to rise. As the home of a handful of China's most iconic spots, Beijing has long been China's top tourist destination, ahead of Shanghai and Xi'an. However, up to the present the makeup of the city's visitors has been overwhelmingly Chinese - 97 percent of tourist arrivals in 2005 were domestic. International arrivals are forecast to increase an average of 10.6 percent a year over the next five years. "Beijing is still not really an international city," says Guan. "But it's getting close."

The economic development of north China will continue to benefit Beijing well into the future. The Binhai New Area, a new development zone along Tianjin's coast on the Bohai Sea larger than Shanghai's Pudong area, is expected to emerge as a growth engine for the entire region. "The Binhai initiative has caught the interest and imagination not only of the domestic but also the international finance industry," says Douglas Red of ANZ Bank. The more it grows, the more Beijing will reap.

A sprint to the finish line: the pre-2008 building rush

The 8,000 construction sites that make up the flurry of building all across Beijing may not all be expressly related to the Olympics in 2008, but it would be nice if they were finished by then. The city will not want endless construction crane-lined rooftops to be the lasting images for the billions of viewers who watch the Games. Improvement is the order of the day, from the modernising of over 1,200 public toilets to a project aimed at making Beijing's tap water safe to drink.

Aside from sports facilities like the new track and field stadium and the futuristic "water cube" aquatic centre, Beijing is pouring US$40 billion into infrastructure projects that will need to be completed if it is to cope with the influx of visitors. Four new subway lines totaling 246 kilometres of track, and 1,509 kilometres of new roads and highways (along with the renovation of another 1,000 kilometres of existing roads) are scheduled for completion by 2007.

A massive new US$2.4 billion international terminal at Beijing Capital International Airport that will boost passenger handling capacity to 50 million is close to being finished, as is an extra 3,800-metre runway. Outside of the city's public spending list are the 110 star-rated hotels under construction that will supplement the 658 already in service. "The city is really ready to accept millions of people each year with that new infrastructure," attests Vlad Reyes, general manager of the Hilton Hotel in Beijing.

Exhausted: Beijing's traffic dilemma

Not long ago, Beijing's nickname "kingdom of the bicycles" was still an apt one. Rusty two-wheelers with screeching breaks clogged the capital's broad boulevards at peak hours, leaving little room on the road for cars. Now the situation is reversed - bumper-to-bumper car traffic is increasingly crowding bikes off the road. Beijing has become the kingdom of the exhaust pipes.

Put plainly, Beijingers have gone crazy for cars in a way that other Chinese urbanites have not. Private autos are three-and-a-half times as common in Beijing households as they are in Shanghai homes. As incomes have risen, owning a car has become a central component of the dreams of the city's middle class - and at a rate out of proportion with expectations.

In 1997 it was expected that the number of civilian cars on the road would reach 2 million by 2010. That number was reached nine years ahead of schedule in 2001, and about 3.5 million engines are now projected to be revving by the 2008 Olympics. "Everybody in Beijing has a car - it's much easier to get a car licence here than in Shanghai," says Leon Guan, who owns a production company in the city. Though he does not drive himself, as he says, "Even my maid drives to and from work."

Levels of nitrogen oxide and sulfur dioxide in Beijing's air far exceed those of other major Asian cities, and the mountains that surround the city to the north and west trap a thick cloud of haze overhead. "The physical environment in Beijing is appalling," says resident Alex McKinnon, who notices a decline in air quality over the past four years. The State Environmental Protection Agency (SEPA) specifically names the proliferation of motor vehicles as the leading cause of Beijing's air pollution. It is becoming clear that expelling coal-burning factories to more remote areas will not be enough to solve the problem.

This does not bode well for what Beijing has been touting as - and desperately hopes will be - a "green" Olympic Games. Caught between citizens' demand for private cars and the high expectations throughout the nation before the city's showcase event, Mayor Wang Qishan said in March: "'It is very hard for me, I'm afraid, to do something that will be a pleasant surprise." Ultimately, Wang will either have to disappoint the entire country or the city's motorists, and it may already be too late to satisfy either group.