People in Hong Kong marked a decade of Chinese rule on Sunday with a colourful parade and a mass street protest to call for progress on democratic reform.

Several thousand pro-democracy protesters streamed through the city as they marched to the government's downtown headquarters from Victoria Park, one of the few remaining vestiges of British colonialism since the Chinese took control on July 1, 1997.

Protesters pack a Hong Kong street while marching to Hong Kong government headquarters on Sunday.
(Kin Cheung/Associated Press)

Under the handover agreement negotiated by Britain and China in 1984, people in Hong Kong are entitled to eventually elect their leader and legislature, although the document is vague on when that is supposed to happen.

Police put the number of protesters at about 20,000, slightly below last year's turnout. Organizers said 68,000 people had turned out.

Many joined the march as it snaked through residential and business districts, with marchers waving banners calling for universal suffrage, cleaner skies and an improvement in social welfare.

"We can all see that there hasn't been any democratic progress in the past 10 years," Anson Chan, the former No. 2 in the government told the Associated Press.

Earlier in the day, Chinese and Hong Kong leaders praised the territory for bouncing back from a turbulent decade of financial, health and political crises, but warned that the next 10 years would pose equally tough challenges from Asian cities threatening to eclipse it as a global business capital.

"The competition ahead is fierce. We are not only competing with neighbouring cities, but with cities around the world," said Hong Kong leader Donald Tsang, a bow-tie-wearing veteran civil servant who was sworn in Sunday for a second term.

At the start of the day, a few hundred people stood near Hong Kong's harbour to watch as the Chinese and Hong Kong flags were hoisted into a cloudy blue sky.

A band played China's national anthem and the crowd cheered when four helicopters pulling the two flags flew overhead, leaving a stream of red smoke.

Hours later, thousands poured onto the streets, waving flags, while about 20 Chinese paratroopers dropped out of the sky.

Chinese patriotism has been a key theme of the anniversary celebrations, which were to be capped with a spectacular fireworks display Sunday night spelling out the words "Chinese people."

"The last 10 years have been OK. What we really need to do is look forward now. Hong Kong people must be optimistic," said spectator Ken Chen, who works in property management.

However, another resident, Rusli Lie, said she feared Hong Kong might get edged out by regional rivals Singapore and Shanghai.

Chinese President Hu Jintao, who arrived in Hong Kong for the celebrations Friday, praised Hong Kongers for their resilience. He also said Hong Kong's "democracy is growing in an orderly way," but made no mention of when residents would get full democracy.

A protester raises a placard that reads 'Universal Suffrage' as thousands of people march in a Hong Kong downtown street on Sunday.
(Vincent Yu/Associated Press)

Since Hong Kong returned to China, the city has been governed under a "one country, two systems" formula. The arrangement has allowed the territory to keep its capitalist economy, British-style legal system, free press and civil liberties.

Although the city has one of Asia's most prosperous and well-educated societies, people in Hong Kong still can't directly elect their leader and entire legislature.

Protesters have staged several rallies during Hu's three-day trip, including burning photos of the Chinese leader and an effigy of what they said was the "butcherous" Beijing regime.

Members of the Democratic party also held a midnight Saturday vigil on the balcony of the legislative building in which they urged Beijing to "trust" Hong Kongers to elect a responsible leader.

Hu steered clear of the protests, and left Hong Kong before Sunday's mass street rally.

Vivian Ma, a secretary, said she had marched every year since 1989, when troops in Beijing brutally crushed pro-democracy protesters, killing hundreds, possibly thousands, and sparking a mass protest in Hong Kong of nearly a million.

"Hong Kong has to fight for universal suffrage," she said. Tsang on Sunday repeated his pledge to tackle the thorny issue during his five-year term. "We will develop a system that is more democratic," he said, without elaborating.

Hong Kong's leader is selected by an 800-seat election committee dominated by Beijing loyalists. Only half of the 60-seat legislature is directly elected, and the rest are picked by professional and special interest groups.