Hong Kong is phonetic translation of the city name 香港 based on Cantonese pronunciation. The name literally means "Spice harbor" or "fragrant harbor." There're a couple of speculations as to why the harbor was named:
1. There's a small stream running through Hong Kong and surrounding area which provides sweet and clear drinking water to the residents. The stream was called "fragrance river" 香江, and Hong Kong received the name as the harbor city.
2. The most possible reason the harbor was named as such probably comes from the fact it has been a major harbor for agarwood, its oil, and resin to be transported from Guang Dong province to northern Chinese provinces. Guang Dong province had always been famous for its agarwood and byproduct. Agarwood has been used in making fragrances, as part of herbal medicine (for internal and external use), added to wine or liquor, or crafted into expensive decoration pieces at home.
Check here for more Hong Kong History: http://en.wikipedia.org/wiki/His...
and Chinese version gets into the name a bit more than English Version:
I think it's quite a romantic name for a harbor city.