The Foreign Affairs Select Committee criticised a million-plus drop in the former colony's electorate, and urged introduction of universal suffrage for legislative council elections and for the post of chief executive.
At present the legislative council did not "accurately reflect the popular will", and the chief executive was appointed by Beijing, the report said.
But the MPs praised China's overall stewardship of Hong Kong, now a Special Administration Region following the handover from Britain on July 1 last year, particularly on the right to protest. The committee found little evidence of repression. "While it is clear that a structure for repression of this freedom exists (some of it inherited from colonial times) it is not used," the report said.
"On the evidence we have seen, the actions of the police and the civil authorities in this area do not appear to have altered since the handover."
Under the "one country, two systems" plan, China promised to allow Hong Kong a high degree of autonomy, except in foreign affairs and defence.
Pro-democracy activists feared the Chinese authorities would immediately crack down on dissent and crush pro-democracy and other protests.
The committee singled out changes to the electoral system for the 60- seat legislative council introduced by Britain in 1995.
The number of voters in 30 seats reserved for business and professionals fell from 1,147,107 in 1995 to 138,984 in 1998 while a further 10 seats were decided by a small election committee.
"The results of two thirds of the seats in the legislative council - 40 out of 60 - are decided by fewer than 140,00 voters out of a total registered electorate of about 2.8 million," said the report. "We believe the structure is fundamentally flawed."
The 12-member committee urged China to bring forward plans for the introduction of universal suffrage for council elections in 2008, criticising the timetable as "too distant".
It also noted a degree of self-censorship by the media, but said newspaper editors "did not appear constrained" by the likely official reaction to stories.Reuse content