The last time the world's most populous nation entered a new growth cycle was in the early 1990s. That boom, which lasted until 1996, was powerful enough to help drive vibrant growth throughout the region.

Some economists believe that history may be about to repeat itself. Fund managers have begun to increase Hong Kong's weighting in regional portfolios, and the search is on for credible stocks with exposure to growth in mainland China.

Statistics released last week support the belief that China is in the midst of a cyclical recovery. Gross domestic product grew by 8.2 per cent in the first half of the year, compared with a full-year figure of 7.1 per cent last year. Annual headline growth has been steadily declining since an overheated 14.2 per cent in 1992.

The important question for China and, by association, for Asia and the Hong Kong stock market is whether this improving economic performance will prove more than a cyclical upturn. The answer is that structural reforms are showing signs of success, but two uncertainties remain.

First, it is unclear whether gains in economic efficiency are enough to offset the chronic misdirection of resources within state-controlled enterprises. Second, there is the question of whether Wall Street can sustain its advance. If US share prices fall and trigger a contraction in consumer activity, China's export-led recovery could be stunted.

The improvements within China's economy resulting from three years of stop-start restructuring span several areas.

First, there are changes in banking. The allocation of bank credit remains among the most wasteful in the world, with more than two-thirds of loans going to a state-owned sector that contributes only about one-third of GDP. Nevertheless, there are signs of savings gradually being diverted to more efficient use. Lending is also increasingly being directed toward the dynamic private sector, which contributes about 33 per cent of GDP, according to a study by International Finance Corporation, the World Bank's private-sector arm.

Second, there is evidence of transformation in the state corporate sector. The process is painful and undignified for many of those involved, but it has allowed the closure of thousands of state factories that are China's worst destroyers of capital.

Third, China is embarking upon an information technology revolution. In 1990 there were fewer than 10 million telephone lines. Now there are 125 million lines, with two million being laid every month. By the end of this year there may be 70 million mobile phone owners, making China the biggest mobile market in the world.

Internet start-ups are proliferating, boosted by venture capital from overseas and a nascent domestic venture capital industry. By the end of this year there may be 20 million Internet users, up from 2.1 million at the start of 1999. Telecoms equipment and consumer electronics companies are expanding rapidly.

Fourth, labour mobility is rising, with millions of rural workers flooding to the cities.

Yet despite these positive trends, a certain pessimism prevails, even in official circles. "The basis of the economic recovery is not stable," says Ye Zhen, spokesman for the state statistics bureau. "The inherent momentum of economic growth is still not sufficient. We will have to continue an active fiscal policy in the next period."

Economists estimate that as much as three percentage points of the 8.2 per cent growth in the first half may have come from a combination of inventory build-up and the effects of government pump-priming.

In addition, high levels of industrial inventory and over-capacity are fuelling price wars that depress corporate profits. Most economists see a slight easing of downward price pressures later in the year.

There are parallel problems in rural areas. The rural economy supports some 900 million people, but incomes rose by only 1.8 per cent in the first half of this year. Increasingly sophisticated urban corporations with easy access to capital have driven many "town and village enterprises" (TVEs) to the brink of financial collapse.

Rural competition brought by urban Chinese and foreign companies will only intensify after Beijing joins the World Trade Organisation, possibly this year.

But the problems should not obscure the fact that, in a number of ways, China's complex and contradictory economy is on the rise.