Hong Kong authorities threw a security blanket across the city early on Wednesday, the 23rd anniversary of the former British colony's handover to Chinese rule, hours after new national security legislation took effect in the financial hub.

The contentious law will punish crimes of secession, subversion, terrorism and collusion with foreign forces with up to life in prison, heralding a more authoritarian era for China's freest city.

Among the details certain to unnerve democracy and rights activists in the city is a ban on violators of the law standing for election and greater oversight of non-governmental organisations and news groups.

Speaking at a flag-raising ceremony to mark the anniversary of Hong Kong's handover in 1997, the city's embattled leader Carrie Lam said the law was the most important development since the city's return to Beijing.

"It is a historical step to perfect Hong Kong safeguarding national security, territorial integrity and a secure system," Lam said at the same harbour-front venue where 23 years ago the last colonial governor, Chris Patten, a staunch critic of the security law, tearfully handed back Hong Kong to Chinese rule.

"It is also an inevitable and prompt decision to restore stability in the society."

About a dozen demonstrators rallied to protest against the new law, which critics fear will crush wide-ranging freedoms promised to Hong Kong for 50 years when it returned to Beijing under a "one country, two systems" style of governance.

Authorities barred an annual march due to be held on Wednesday, citing a ban on gatherings of more than 50 people in a bid to curb coronavirus, but many activists pledged to defy the order and march later in the afternoon.

The annual rally is traditionally held to air grievances over everything from sky-high home prices to what many see as Beijing's increasing encroachment on the city's freedoms.

"We march every year, every July 1, every October 1 and we will keep on marching," said pro-democracy activist Leung Kwok-hung.

On July 1 last year, hundreds of protesters stormed the city's legislature to protest against a now-scrapped bill that would have allowed extraditions to mainland China, trashing the building in a direct challenge to authorities in Beijing.

Those protests evolved into calls for greater democracy, paralysing parts of the city and paving the way for Beijing to directly impose national security law on Hong Kong, a move that has drawn condemnation from some Western governments.

Critics fear the legislation will crush wide-ranging freedoms in Hong Kong denied to people in mainland China that are seen as key to its success as a global financial centre.

Authorities in Beijing and Hong Kong have repeatedly said the legislation is aimed at a few "troublemakers" and will not affect rights and freedoms, nor investor interests.