This is the flag of the Free City of Hong Kong. It comes from a world where Britain handed over Hong Kong to Taiwan rather than the People's Republic of China. British leaders were able to convince both of the Chinas to allow Hong Kong to hold a referendum to decide its fate. The overwhelming majority voted to join Taiwan. The PRC demanded a recount, and Taiwan agreed to hold another referendum. This time, however, Hong Kong voted to become and independent city-state. America and Britain agreed to defend Hong Kong's independence if it were ever threatened. Tensions ran right for a few days but, reluctantly, the PRC agreed to respect Hong Kong's sovereignty. Though they also built a large wall along their border with Hong Kong. The PRC claimed this was to keep Hong Kongers out, but almost everyone knew it was really to keep their citizens in.
Hong Kong is an economic powerhouse just as it is in our world. It maintains close relations with Taiwan. The two nations operate a mutual immigration policy, colloquially referred to as the Free China Corridor. As a result, Hong Kong is slightly less crowded than in our world. Hong Kong also maintains good relations with Britain and is a member of the Commonwealth of Nations.
The flag symbolizes Hong Kong's mixed Chinese and British heritage. The stripes harken back to the flag of the British East India company. That they also resemble the America flag, and thus act like a middle finger to the PRC, is a happy coincidence. The lotus flower represents Chinese influences on Hong Kong's culture.