The new settlement did not go well at first. It attracted unruly elements, while fever and typhoons threatened life and property. Crime was rife. The population rose from 32 983 (31 463 or 95 per cent Chinese) in 1851 to 878 947 (859 425 or 97.8 per cent Chinese) in 1931. The Chinese influx was unexpected because it was not anticipated they would choose to live under a foreign flag.

The Chinese asked only to be left alone and thrived under a liberal British rule. Hong Kong became a centre of Chinese emigration and trade with Chinese communities abroad. Ocean-going shipping using the port increased from 2 889 ships in 1860 to 23 881 in 1939. The dominance of the China trade forced Hong Kong to conform to Chinese usage and to adopt the silver dollar as the currency unit in 1862. In 1935, when China went off silver, Hong Kong had to follow suit with an equivalent 'managed' dollar.

Hong Kong's administration followed the normal pattern for a British territory overseas, with a governor nominated by Whitehall and nominated Executive and Legislative Councils with official majorities. The first non-government members of the Legislative Council were nominated in 1850, and the first Chinese in 1880 (Singapore-born lawyer Ng Choy); the first non-government members of the Executive Council appeared in 1896, and the first Chinese in 1926 (Sir Shouson Chow). In 1972, the long-standing arrangement that two electoral bodies — the Hong Kong General Chamber of Commerce and the Unofficial Justices of the Peace — were each allowed to nominate a member to the Legislative Council, was discontinued.

The British residents pressed strongly for self-government several times but the UK Government consistently refused to allow it, saying the Chinese majority would be subject to the control of a small European minority. A Sanitary Board was set up in 1883, became partly elected in 1887, and developed into an Urban Council in 1936.

The intention, at first, was to govern the Chinese through Chinese magistrates seconded from the Mainland. But this system of parallel administrations was only half-heartedly applied and broke down mainly because of the weight of crime. It was completely abandoned in 1865 in favour of the principle of equality of all races before the law. In that year, the Governor's instructions were significantly amended to forbid him to assent to any ordinance 'whereby persons of African or Asiatic birth may be subjected to any disabilities or restrictions to which persons of European birth or descent are not also subjected'. Government policy was laissez-faire, treating Hong Kong as a market place open to all and where the Government held the scales impartially.

Public and utility services developed — the Hong Kong and China Gas Company in 1861, the Peak Tram in 1885, the Hongkong Electric Company in 1889, China Light and Power in 1903, the electric tramways in 1904 and the Kowloon-Canton Railway, completed in 1910. Successive reclamations began in 1851 — notably one completed in 1904 in Central District, which produced Chater Road, Connaught Road and Des Voeux Road; and another in Wan Chai between 1921 and 1929.

Public education began in 1847 with grants to the Chinese vernacular schools. In 1873, the voluntary schools — mainly run by missionaries — were included in a grant scheme. The College of Medicine for the Chinese, founded in 1887 with Sun Yat Sen as one of its first two students, developed into the University of Hong Kong in 1911 and offered arts, engineering and medical faculties.

After the Chinese revolution of 1911, which overthrew the Qing Dynasty, there was a long period of unrest in China and many people found shelter in Hong Kong. Agitation continued after Chinese participation in World War I brought in its wake strong nationalist and anti-foreign sentiment — inspired both by disappointment over failure at the Versailles peace conference to regain the German concessions in Shantung (Shandong) and by the post-war radicalism of the Kuomintang.

The Chinese authorities sought to abolish all foreign treaty privileges in China. Foreign goods were boycotted and the unrest spread to Hong Kong, where a seamen's strike in 1922 was followed by a serious general strike in 1925-26 under pressure from Canton. This petered out, though not before causing considerable disruption in Hong Kong. Britain, with the largest foreign stake in China, was at that time a main target of anti-foreign sentiment, but Japan soon replaced it in this odious role.