Classical and quantum fluctuations are analyzed in the system of type-II harmonic generation where two frequency-degenerate subharmonic fields with orthogonal polarizations are required for the generation of a harmonic field. The two subharmonic fields as well as the harmonic fields are on resonance in a cavity. It is found that there is no self-pulsing behavior as predicted for the type-I case where the intensities of both the subharmonic and the harmonic fields undergo fast oscillation. Instead there exists a threshold that is identified as the onset of an optical parametric oscillator (OPO) formed by a subharmonic mode with its polarization orthogonal to the input polarization (not the original modes). When the loss for the harmonic field is small, most of the input power is converted to the output power of the OPO. Under this circumstance, quantum-nondemolition measurements of the input can be performed at certain frequencies. The spectra of squeezing are calculated for the two subharmonic modes and it is found that both modes are squeezed for a certain range of frequency. The output of the OPO is found to exhibit phase squeezing.