The participants gathered in a park in the territory's business district on a scorching summer day, huddling under umbrellas and fanning themselves, before setting off for the march.
The procession of people choked roads for several kilometres from Victoria Park to the government headquarters.
Call for democracy
Demonstrators carried signs reading "Promote Democracy!" and chanted, "Return power to the people!" as they walked.
Lee Cheuk-Yan, a Hong Kong legislator, told Al Jazeera: "The people have a lot of grievances against the government.
"They don't see that the government has the mandate and the legitimacy to represent the Hong Kong people.
"Although we don't have democracy, we still have freedom of expression. That is something we are very eager and desperate to preserve."
Criticising Hong Kong's politicians for not serving the territory, Joan Wong, from the Alternative Democratic Alliance, said: "I don't see anything they have done, or they will do".
A formal parade earlier in the day involving dragon dancers, soldiers and children in colourful costume was staged to mark the anniversary of the handover.
Since its return to Chinese rule on July 1, 1997, Hong Kong has largely retained its Western-style civil liberties, including press freedom and the right to hold public protests.
But its people still cannot directly elect the city's chief executive or all legislative members.
Turnout for last year's protest was relatively low because of a strong economy and a period of national pride in the run-up to the Beijing Olympics.
But organisers say that with Hong Kong's economy now in a slump and unemployment on the rise, many more people joined Wednesday's demonstration.
As part of this year's march, hundreds of civil servants and government contract workers protested as organised groups for the first time.
They are demanding better work conditions and pay - signs of public frustration that experts say could alarm Beijing.