There is now ample reason to believe that China's economy, the most important in Asia outside Japan, is set this year to emerge from seven consecutive years of slowing growth.

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

Some economists now believe that history may be about to repeat itself. "China is looking better than it has at any time since the early 1990s," says Christopher Wood, chief global emerging markets strategist, at ABN AMRO Asia.

"Evidence of the improved cyclical tone comes from better retail sales data, strong exports, declining personal deposit growth and rises in reported inflation, particularly in urban centres such as Shanghai," Mr Wood adds.

Recent statistics support his assertion. Gross domestic product grew at 8.2 per cent in the first half of the year, compared with a full-year growth figure of 7.1 per cent last year. Annual headline growth has been steadily declining since an overheated 14.2 per cent in 1992.

But the crucial question for China - and, by association, for Asia and the future of the Hong Kong stock market - is whether this year's improving economic performance will prove to be more than just a cyclical upturn in the wake of Asia's financial crisis.

There is no doubt that structural reforms are proceeding faster that at any time over the past two years and that new efficiencies are being created.

But it remains tough to call whether these new advances will be enough - in the longer term - to offset the chronic misdirection of resources that still plagues the Chinese economy.

Exports have been the main driver of growth this year, surging 38.3 per cent year on year to $114.5bn in the first half, creating a trade surplus of $12.4bn.

Domestically, too, several positive signs are emerging as results from three years of reform pushed by China's hard-driving premier, Zhu Rongji, become evident.

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 around one-third of GDP. Nevertheless, there are indications that, incrementally, savings are being diverted to more efficient users.

Jiang Jianqing, chairman of the Industrial and Commercial Bank of China, the biggest state bank, says that around Rmb60bn ($7.2bn), or just over 20 per cent of the bank's new lending, will this year be channelled into mortgages and other forms of consumer credit.

At the same time credit allocation to the inefficient state-owned sector is being scaled back as state banks, many of which are preparing for stock market listings, seek out the more dynamic members of a burgeoning private sector in an attempt to improve asset quality.

Such a transition is evident in Shenyang, a city in China's north-eastern "rust belt", where a vigorous private sector is rising from the ruins of socialist-era heavy industry.

Mu Suixin, the mayor, says the private sector now contributes 48 per cent of local GDP, up from less than 20 per cent at the start of 1998. Similar processes are visible in Chongqing, a large industrial city in the south-west, where 90,000 of the 100,000 people laid off from state companies last year were re-employed in the private sector, officials said.

In a different area, China is embracing information technology with an alacrity that promises to translate into tangible commercial gain.

In 1990, there were fewer than 10m telephone lines. Now there are 130m lines, with 2m being laid every month. By the end of this year, there may be 20m internet users, nearly ten time the 2.1m at the start of 1999. E-commerce volumes are small but growing.

For the first time since the 1949 revolution, home sales on the secondary market in Shanghai have outstripped primary market sales - suggesting that a significant wealth effect may be created.

And yet, despite these positive long-term trends, an aura of hesitancy over China's growth prospects prevails. "The inherent momentum of economic growth is still not sufficient. We will have to continue an active fiscal policy in the next period," says Ye Zhen, spokesman for the state statistics bureau.

Economists have estimated 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 to the Rmb100bn in special state infrastructure bonds already issued this year, the government announced last month it would launch Rmb50bn more in the second half of this year.

While this spending should help ensure that China achieves a headline full year growth figure of more than last year's 7.1 per cent, it also reveals that the quality of China's economic expansion is far from ideal.

Government leaders are concerned that the country's expected accession into the World Trade Organisation either late this year or early next will precipitate mass redundancies, hit consumer spending and endanger social stability.

Even before the intense competition that WTO access may bring, the high levels of industrial inventory and overcapacity are fuelling price wars in many industries and depressing corporate earnings.

Deflation, China's chief economic ill since the Asian financial crisis shook the region, is more stubborn than many economists predicted.

Retail prices fell 1.9 per cent in the first half, but the more broadly defined consumer price index showed signs of recovery, climbing by 0.1 per cent. Now, economists are forecasting a slight easing of downward price pressures later in the year.

But despite the lingering uncertainties, the outlook is more positive now than at any time since Asia's crisis began in 1997.