Thousands of Hong Kong protesters have marched for full democracy and called on the Chinese-controlled city's leader to resign, just weeks after lawmakers voted down an electoral reform package backed by Communist Party leaders in Beijing.

Some protesters known as "localists", fighting for greater autonomy and even independence from China, held up signs calling for a "Hong Kong nation", while others waved Hong Kong's old colonial-era flags featuring Union flags.

"I want real universal suffrage" the crowds chanted on a sweltering day, with many holding yellow umbrellas, a symbol of the Umbrella Movement last year when protesters blocked major roads to pressure Beijing to allow direct elections in 2017.

"The Umbrella Movement has not come to an end, because we have not got genuine universal suffrage," said Eve Lam, a 53-year-old office assistant who was handing out paper umbrellas to passers-by.

The crowds, closely watched by scores of police, were thinner than a year ago when some half a million people showed up for the annual July 1 march on the anniversary of the city's return to China in 1997.

Then, police arrested more than 500 people who blocked a road in the financial district, a prelude to the Occupy movement in late September.

"CY Leung step down," shouted student democracy leader Joshua Wong to the passing crowds, referring to leader Leung Chun-ying. "Remake the future of our city. Build a democratic Hong Kong."

Hong Kong and Chinese officials attended a flag-raising ceremony in the morning with helicopter fly-bys and the playing of China's national anthem.

The protest march comes nearly two weeks after Hong Kong's legislature vetoed a Beijing-backed electoral reform proposal that had triggered the sometimes violent protests in the city, presenting Beijing with one of its most serious challenges in years.

Hong Kong leader Mr Leung called for the city to move forward.

"Even though political reforms have taken up considerable effort and time, the Hong Kong government will strengthen economic development and improve people's livelihoods," he said in a speech.

Hong Kong returned to China under a "one country, two systems" formula that granted the city wide-ranging freedoms denied in mainland China.