HONG KONG (Reuters) - Chinese President Xi Jinping, visiting Hong Kong for the 20th anniversary of its return to Chinese rule, said on Friday the city's "one country, two systems" formula faces "new challenges" as pro-democracy campaigners ramped up their protests.

Xi's visit comes amid heightened tension between China and the former British colony, where many are concerned at increasing interference by Beijing in the city's affairs, despite the promise of wide-ranging autonomy under the "two systems" agreement.

The battle for full democracy, vividly illustrated by 79 days of "Occupy" street protests in 2014, has been a defining issue for the city of 7.3 million. It has sown distrust, polarized politics and hampered governance.

Pro-China protesters raise their flags right in front of pro-democracy protesters holding posters as two groups face in central Hong Kong, China, as the city marks the 20th anniversary of the city's handover from British to Chinese rule, June 30, 2017. REUTERS/Damir Sagolj

"In the 20 years since Hong Kong was returned to the motherland, the success of ‘one country, two systems’ is recognised by the whole world," Xi said in a speech.

"Of course, during the implementation, we’ve met some new situations, new issues and new challenges. On these issues, they need to be regarded correctly and analysed rationally... Issues are not scary. The key is to think of ways to solve these issues."

Without giving specifics, Xi said these needed to be corrected and not handled with an "emotional attitude".Xi earlier inspected more than 3,000 People's Liberation Army troops on the second day of his first trip as president to the financial hub ahead of Saturday's anniversary. The PLA said it was the largest military parade in the city since the 1997 handover.

Pro-China protesters shout at pro-democracy protesters facing each other in central Hong Kong, China as the city marks the 20th anniversary of the city's handover from British to Chinese rule, June 30, 2017. REUTERS/Damir Sagolj

Some analysts said the show of force was meant to address growing calls among some radical young activists for greater self-determination, or even independence from China, a red line for Communist Party rulers in Beijing.

LOW-KEY PRESENCE OF PLA

Xi praised the Hong Kong government under Beijing-backed leader Leung Chun-ying, saying it had "effectively tackled Hong Kong independence forces and maintained social stability".

The presence of the PLA in the city has long been one of the most sensitive parts of the city's reversion to Chinese rule, but the garrison, thought to number between 8,000 and 10,000, has kept a noticeably low-key presence.

Protesters hold posters of pro-democracy activists as they face pro-China protesters in central Hong Kong, China as the city marks the 20th anniversary of the city's handover from British to Chinese rule, June 30, 2017. REUTERS/Damir Sagolj

Hong Kong's large and well-equipped police force - dominated by Hong Kong recruits - remains responsible for routine domestic security and was protecting the streets surrounding the base on Friday.

Security has been tight ahead of the July 1 anniversary, with some 9,000 police reportedly deployed to maintain order. Protesters have been kept well away from Xi and his entourage, his hotel, and the venue for Saturday's ceremony.

Police divides pro-China and pro-democracy protesters facing each other in central Hong Kong, China as the city marks the 20th anniversary of the city's handover from British to Chinese rule, June 30, 2017. REUTERS/Damir Sagolj

Banners critical of China have been largely absent from the streets, though a rally on Saturday could draw tens of thousands of people in an annual demand for full democracy.

Few expect anywhere near this scale of protest during Xi's visit, but activists and civil society groups are planning a number of demonstrations. These include a pro-independence rally claiming that Hong Kong had now in effect become a repressed Chinese colony.

Other protests will demand the release of Chinese Nobel Peace laureate Liu Xiaobo and justice for victims of the Tiananmen crackdown in Beijing in 1989, that could draw thousands.

Hong Kong authorities released 26 pro-democracy protesters on Friday who were arrested before Xi's arrival.

"Democracy Now! Now!," they shouted on being released, including young Occupy protest leader Joshua Wong.

(Additional reporting by Donny Kwok, Susan Gao, William Ho and Jasper Ng, Doris Huang; Editing by James Pomfret and Nick Macfie)

Hong Kong 20th anniversary of its return to China images

Protesters take part in a candlelight vigil demanding the release of Chinese Nobel rights activist Liu Xiaobo, during Chinese President Xi Jinping visiting, ahead of 20th anniversary of the city's handover from British to Chinese rule, in Hong Kong, China June 29, 2017. REUTERS/Tyrone Siu
China's President Xi Jinping and Hong Kong's outgoing Chief Executive Leung Chun-ying give thumbs up as they pose for photographs with members of the Hong Kong Police Force's Junior Police Scheme during a visit at the scheme's Permanent Activity Center and Integrated Youth Camp in Hong Kong, China, June 30, 2017. REUTERS/Justin Chin/Pool
China's President Xi Jinping waves to members of the Hong Kong Police Force's Junior Police Scheme as Leung Chun-ying, Hong Kong's outgoing Chief Executive, looks on during a visit at the scheme's Permanent Activity Center and Integrated Youth Camp in Hong Kong, China June 30, 2017. REUTERS/Justin Chin/Pool
China's President Xi Jinping shakes hands with a member of the Hong Kong Police Force's Junior Police Scheme during a visit at the scheme's Permanent Activity Center and Integrated Youth Camp in Hong Kong, China June 30, 2017. REUTERS/Justin Chin/Pool
China's President Xi Jinping and Hong Kong's outgoing Chief Executive Leung Chun-ying look at a demonstration by members of the Junior Police scheme during a visit at the scheme's Permanent Activity Center and Integrated Youth Camp in Hong Kong, China June 30, 2017. REUTERS/Justin Chin/Pool
Tycoon Li Ka-shing (4th L) applauds as visiting Chinese President Xi Jinping speaks at a photo session in Hong Kong, China June 30, 2017. REUTERS/Bobby Yip
Tycoon Li Ka-shing looks on beside Lui Che-woo (3rd L) before a photo session with Chinese President Xi Jinping in Hong Kong, China June 30, 2017. REUTERS/Bobby Yip
Chinese President Xi Jinping (R) is greeted by tycoons Li Ka-shing and Lui Che-woo before a photo session during Xi's visit in Hong Kong, China June 30, 2017. REUTERS/Bobby Yip
Chinese President Xi Jinping (R) is greeted by tycoon Li Ka-shing before a photo session during Xi's visit in Hong Kong, China June 30, 2017. REUTERS/Bobby Yip
Chinese President Xi Jinping inspects troops at the People's Liberation Army (PLA) Hong Kong Garrison as part of events marking the 20th anniversary of the city's handover from British to Chinese rule, in Hong Kong, China June 30, 2017. REUTERS/Damir Sagolj
Chinese President Xi Jinping inspects troops at the People's Liberation Army (PLA) Hong Kong Garrison as part of events marking the 20th anniversary of the city's handover from British to Chinese rule, in Hong Kong, China June 30, 2017. REUTERS/Damir Sagolj
A man takes pictures with a phone with a Union Flag casing after Chinese President Xi Jinping (not pictured) inspected troops at the People's Liberation Army (PLA) Hong Kong Garrison as part of events marking the 20th anniversary of the city's handover from British to Chinese rule, in Hong Kong, China June 30, 2017. REUTERS/Damir Sagolj
Soldiers march at a People's Liberation Army (PLA) base in Hong Kong as part of events marking the 20th anniversary of the city's handover from British to Chinese rule, June 30, 2017. REUTERS/Damir Sagolj
Troops shout as they prepare for the arrival of Chinese President Xi Jinping (unseen) at the People's Liberation Army (PLA) Hong Kong Garrison as part of events marking the 20th anniversary of the city's handover from British to Chinese rule, in Hong Kong, China June 30, 2017. REUTERS/Damir Sagolj
Troops prepare for the arrival of Chinese President Xi Jinping (unseen) at the People's Liberation Army (PLA) Hong Kong Garrison in one of events marking the 20th anniversary of the city's handover from British to Chinese rule, in Hong Kong, China June 30, 2017. REUTERS/Damir Sagolj
Guests have their picture taken in front of armoured vehicles after Chinese President Xi Jinping (unseen) inspected troops at the People's Liberation Army (PLA) Hong Kong Garrison as part of events marking the 20th anniversary of the city's handover from British to Chinese rule, in Hong Kong, China June 30, 2017. REUTERS/Damir Sagolj
Sweat is wiped off the face of one of soldiers as troops prepare for the arrival of Chinese President Xi Jinping (unseen) at the People's Liberation Army (PLA) Hong Kong Garrison in one of events marking the 20th anniversary of the city's handover from British to Chinese rule, in Hong Kong, China June 30, 2017. REUTERS/Damir Sagolj
Soldiers shout as they prepare for the arrival of Chinese President Xi Jinping (unseen) at the People's Liberation Army (PLA) Hong Kong Garrison as part of events marking the 20th anniversary of the city's handover from British to Chinese rule, in Hong Kong, China June 30, 2017. REUTERS/Damir Sagolj
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