China may have won the latest round in its long-running battle with Hong Kong over genuine democracy, but in a city simmering with anger and ingrained with activism the issue will not go away.

Pro-democracy campaigners had threatened for more than a year to take over the streets of the city's financial district if their demands for full universal suffrage were not met.

But Beijing called their bluff, insisting the financial hub's next leader be vetted and dealing a major blow to Hong Kong's decades old democracy movement.

Activists have since struggled to respond.

After initially vowing a new "era of civil disobedience", leaders from Occupy Central, the largest grassroots group, backtracked, admitting little can be done to change China's mind -- and even hinting that support for their cause was waning.

But while senior officials in Beijing might look with glee at the discord in the ranks of Hong Kong's democracy campaigners, the issues that fuel them -- and encourage hundreds of thousands of protesters onto the city streets every year -- still remain.

Regardless of whether the city's civil disobedience thrives or fizzles out, China's crucial economic hub still faces a political crisis brought on by deepening social anger, analysts say.

"My prediction is this (social unrest) will get worse because of the latest decision from Beijing," Surya Deva, a law professor at City University of Hong Kong said, adding that "Hong Kong has been experiencing a governance crisis for a while".

Increasing income inequality and the perceived cosiness between city officials and business elites have driven the demand for a more representative and accountable leader, he explained, adding that the chief executive has always been viewed as unaccountable.

"Rather, he represents Beijing and the elites, including the business community."

- City could become 'ungovernable' -

Unless Beijing does more to address this anger, analysts warn, the city risks becoming ungovernable, with continued street protests and outraged pro-democracy lawmakers promising to be a permanent thorn in the government's side.

"The democrats have already said they will be fully uncooperative throughout, so how can you cope? How could anyone run Hong Kong?" veteran democracy campaigner Martin Lee told AFP.

"If the chief executive is... at least not a slave of Beijing... then we can work with him."

Ma Ngok, a professor at the Chinese University of Hong Kong, said the demand for greater democracy was just one manifestation of a much wider anger over inequality and reduced opportunities.

"Economic and social problems discredit the current system in terms of the income disparity. It seems that the government is too pro-business so that adds to the demand for democracy," Ma said.

The wealth gap in Hong Kong, already one of the world's widest, shows little sign of abating.

Anger also bubbles over rising living costs and skyrocketing property prices. The government last year found almost 20 percent of residents in the city of over seven million were living in poverty.

Pro-democracy groups recognise this. Knowing they now have little chance of defeating Beijing over universal suffrage, networks like Occupy are changing tactics and settling in for a much longer and protracted fight with the mainland.

"They will try to turn back this humiliating defeat into an opportunity to educate the public about the fact that this would be a long drawn out struggle," Chinese University of Hong Kong political analyst Willy Lam told AFP.

"They have admitted that it is impossible for them to change Beijing's electoral mechanism, so I think the Occupy Central movement has morphed into a civic education campaign and mobilisation campaign," Lam said.

- Delicate balance -

Occupy organisers know they tread a difficult path between keeping popular anger simmering and not losing local support through overly confrontational actions in a city where economic stability is a golden calf.

"On one hand we need to create disturbance so that the authorities will pay attention to what we are demanding... at the same time we need to bring sympathy from the rest of the community," Occupy co-founder Chan Kin-man told AFP.

"All along, people talk so much about paralysing Central, they only look at the disruptive side of civil disobedience... we need to be very careful to strike this balance," Chan added.

The movement meanwhile has gone into damage limitation mode since a series of despondent interviews by its leaders, sending out fiery statements reaffirming their commitment to direct action.

Hong Kong University law expert Simon Young said Occupy was caught between "a rock and a hard place" -- the rock China, and the hard place Hong Kongers' expectations.

"It (Occupy) is in a very difficult position," he said.

Meanwhile Hong Kong students -- many of whom are at the more radical end of the political spectrum -- have vowed to press on with their own civil disobedience campaign.

On Saturday, multiple student groups from different universities will vote on a plan to hold a week long strike later this month.

"There is still a very real danger that those under age 30 will undertake actions without direction from Occupy Central organisers," said Michael DeGolyer, a professor at Hong Kong Baptist University and commentator on local politics.

"But their isolated actions will just turn more against them."