When the Demon Sorcerers were banished by the Eight Immortals, traces of the demon's chi was left in the items used by the Immortals. So when the bad Chi stars aligned, the Items used by the Eight Immortals activated, and the User would become imbued with the power of the respective demon sealed away.
This encouraged Drago, the son of Shendu, to break out of Section 13 and find the Immortal Items to absorb the powers of his demon aunts and uncles. After breaking free, Drago recruited Ratso, Finn, and Chow for the first chi, the wind demon, by giving a portion of his own fire chi. Because they were defeated by the wind-powered Jade they got fired. The rest of the series, he recruited Strikemaster Ice's gang, giving another portion of his demon chi to them. When demon chi is absorbed, the host slowly transforms into the demon itself but leaving minor changes, this is explained when Jade absorbed the wind chi and Larry who is almost completely transformed into Dai Gui. Later in the final episode, Drago manages to absorb all 7 demon chi's thus making them unremovable. He gives his henchmen another 'taste' of demon chi, wind, earth and thunder. When Tohru and Uncle seal Drago and the released Talisman-powered Shendu into the Ntherworld all chis and Talismans are locked away forever.
Tchang Zu, Demon of Thunder
Immortal Item: Castonets
Chi Absorbed by: Drago then DJ Fist
Bai Tza, Demon of Water
Immortal Item: Gourd
Chi Absorbed by: Drago
Because Shendu was also sealed into the Demon Netherworld, it can be assumed that some of Shendu's Chi was also sealed. Why Drago did not pursue his father's Chi is guessed because Drago already possessed Fire demon Chi.
Also, since the Heroes re-sealed the Demons, it can be assumed that the artifacts the Heroes used also contains Demon Chi; but just hasn't been activated yet.