Of the millions of lives turned upside down as China undergoes one of the most dramatic bursts of development in history, few can have changed as suddenly and totally as that of Huang Zongjin.

Until recently, Huang was scratching out a living by cultivating rice and vegetables on the banks of the Yangtze river near Wushan town. Like the majority of China's 1.2 billion population, he lived the poor but predictable existence of the Chinese peasant, which had been almost as immutable as the landscape for hundreds of years.

But, then came the order to move. The engineers and the politicians decided the old landscape - famous around the world for its beauty - was not good enough to satisfy the needs of a resurgent new China. In the most ambitious hydro-engineering project ever undertaken, they started to dam up the Yangtze, the world's third largest river, just downstream from the Three Gorges. Huang and more than 700,000 others had the choice of leaving or being submerged along with their homes, fields and temples, as the waters of the Yangtze, known in China as "the dragon", began to rise.

So Huang the farmer has become Huang the boatman. Instead of working the land to grow food for his family, he hustles the busy portside to take tourists on unlicensed boat trips up the Yangtze - and over his old home, which disappeared beneath the water this summer.

With the compensation money he received for relocating, he and his family bought the dilapidated 15-metre skiff they use for tours and whatever haulage jobs they can find. The govern ment has built the family a new, far bigger, hillside home. It commands a spectacular view of the river and the new city of Wushan, but as yet has no running water or electricity. Although they grow a few vegetables, the land is too steep to be cultivated. But Huang is sanguine. "I may float over my old home every day, but I never think about it. What's the point?" says the 32-year-old. "We can't change anything. And besides, life is better now. We have a new home, more space and more money. The dam has been good for us."

Outside China, the Three Gorges dam is rarely described in such a positive light. By affecting so many lives and redrawing one of the world's most spectacular stretches of scenery, the controversial 17-year project has long been a focal point for international concerns about the communist government's dire record on human rights and the environment. Always highly politicised, the dam - the dream of leaders dating back to Sun Yat Sen and Mao Zedong, before it was pushed through by the new generation of engineers-turned-politicians who rule China - has become virtually synonymous with corruption, secrecy, financial incompetence and a leadership that refuses to allow its people's wishes to impede the realisation of ambitious and lucrative state plans.

During the dam's preparatory work, criticism often drowned out the planned benefits, chief of which were the prevention of the devastating Yangtze basin floods, which have killed millions of people, and the hydro-generation of 18,200 megawatts of electricity, supplying a tenth of China's needs and saving the nation from having to construct more than a dozen nuclear power plants or burning 50m tonnes of coal. With international conservation and human rights groups condemning the project, and economists predicting it would lose a fortune, the Three Gorges dam failed to win financial support from the World Bank or overseas investors.

But has it really been the environmental, human and economic disaster so many people predicted? A trip along the Yangtze, following the recent completion of the second and most ambitious stage of the dam, showed the immense cost that has been paid, but it suggested that, in these early stages at least, the people and the land are adapting better than many had predicted.

The journey starts at Chongqing, China's fourth biggest city and the most popular boarding point for the hundreds of multi-deck tourist cruisers, speedboats and giant container ships that have long since replaced junks and sampans as the Yangtze's main traffic. Barring the docks, where stevedores still use bamboo and rope to carry cargo as they have done for more than a century, Chongqing is very much a city of the new China. The city centre is full of gleaming shopping malls, nightclubs, brothels and construction sites. The concentration of skyscrapers seems greater than that in Shanghai and Beijing, and the plethora of cranes suggests many more are on their way.

Some elements of the old regime remain: spying, bugging and police intimidation are commonplace. The government is terrified of criticism of the Three Gorges project, into which it has invested so much financial and political capital. The nervousness and intrusiveness of the authorities was apparent as soon as I arrived. Although I had tried to arrange the trip in secret, the police called one of the people I was meeting to warn them not to say anything to the Guardian. The only way they could have known of our appointment was through an informer or by bugging our telephone conversations - something the police either don't do, or are more discrete about, elsewhere in China.

In another sense, however, China has become more liberal. I was meeting Wu Dengming of the Chongqing Green Volunteers League, an environmental NGO whose existence would have been unthinkable even 10 years ago. Wu, a veteran of the People's Liberation Army, has won support from the World Bank for his campaigns against illegal logging and, more recently, factory pollution of the Yangtze. His group, mostly young students, are currently demonstrating outside the Xiao'anxi plant, which is dumping toxic industrial waste into the river. Although it is a clear violation of the law, city officials are reluctant to act because their priority - as is common in China - is economic growth. Polluting industries are tolerated as long as they generate profits.

The public is kept in the dark as much as possible about such issues. Local journalists say they are aware of the illegal pollution, but have been told by their editors not to report the story. Wu fears the Three Gorges dam could go disastrously wrong unless the central and local governments take tougher action on polluters and improve water purification facilities.

"The water quality is deteriorating," says Wu. "When the water level rose, it submerged a huge amount of rubbish, but the water speed has slowed down dramatically so the river is less able to clean itself." There are already signs that the blocked-up Yangtze may be stagnating. Earlier this year, government inspectors admitted for the first time that the water quality on one stretch of the river near Chongqing was no longer fit for human consumption - though it would not reveal why. Wu is not opposed to the dam, which he says will improve more lives than it damages, but he says it was built for economic and political reasons, which means the authorities are only belatedly starting to deal with the environmental consequences.

The prospect of the 200km stretch of the river along the Three Gorges turning into a giant cesspool has prompted the government to announce plans to build 200 new sewage and waste treatment plants by 2010. Wu says it is uncertain whether this will solve the problem.

"The government is now doing all it can, and the new faculties will have a positive impact," he says. "But I'm not sure it will be enough to solve the problem of pollution. Only time will tell." The human impact is still unknown. Since the project began in 1993, 720,000 people have been relocated, many against their will. Another half a million or so are being told to move for the final stage, which will end in 2009.

Among the worst affected areas is Fengdu, 110 miles downstream of Chongqing. Once a popular tourist spot famed for its spooky legends, the old city has become a real ghost town as 80% of its former residents have been forced out. What's left resembles a battle zone.

Many of the empty buildings have been gutted or reduced to rubble, their inhabitants cleared in preparation for the third and final stage of the dam, which will see the river's waters rise by another 50 metres. Some people have gone willingly to new homes on the other side of the river, but in the dark and narrow alleyways, many are reluctant to move. These are the poorest of the poor - the elderly and handicapped - who pay the equivalent of £1.50 per month for substandard, but heavily-subsidised state housing. Although they dislike their current homes, they cannot afford the new accommodation offered by the government, which costs four times as much. What little compensation they are entitled to, they say, has been taken by corrupt local officials.

"We don't want to move, but we have no choice," says one elderly lady. "Chairman Mao would never have done this to us, but these days officials only think about how they can line their pockets."

Opposition to the dam has been fiercest here. Several protests have been staged and the police maintain a visible presence in the area. Notices pasted on boarded-up houses warn locals that it is illegal to gather in large numbers, to petition local officials or to hold up traffic. According to residents, the notices appeared soon after a recent protest outside the city hall that resulted in a demonstrator being run over by an official he was trying to petition.

The people of this neighbourhood, however, appear to be in the minority. Most of the people I spoke to along the river are either positive or fatalistic about the dam. Ship and ferry boat captains say the Three Gorges, famed for their treacherous waters, are now much safer to navigate. Several relocated people say their new homes are bigger and much better equipped than their old homes. A nurse says the government has built new hospitals and roads to appease local opinion. Tourists from other parts of the country say they are impressed at how affluent the towns and cities along the Yangtze now look compared with towns in other parts of inland China.

As our vessel slipped through the gorges, I could see what they meant, although it was not my idea of an improvement in the scenery. New towns with skyscrapers are springing up all along the river. To the outsider, they look horribly like every other city in China - the same standard buildings with white tiles and tinted windows, and the same wide roads and construction sites. Several of the cities outside the gorges also have giant concrete embankments, which are an eyesore. But all the people I spoke to prefer the new houses and most are pleased that the high cement walls will reduce the risk of flooding and landslides.

This is the New China, as was my boat, the China Universe, a multi-tiered and rather scruffy tourist cruise ship whose only connection to the romantic age of junks is a hiccuping karaoke machine filled with romantic and patriotic songs about the Yangtze.

But the gorges themselves are awe-inspiring. Though one mountainside is besmirched with a huge white tape measure marking out where the water will rise next, and rubbish - including plastic flip-flops, empty instant noodle containers, oil canisters and the odd piece of corrugated-iron roofing - eddies in the water, in most places the gorges are still imposingly steep and narrow.

After passing through the last of the three - Xiling gorge - we hit the dam, the ultimate wet dream of the communist engineers who run China. In the morning it is a vast concrete monstrosity, but after dark it is almost as awe-inspiring as the gorges. On one side are the two five-tier locks, so brightly illuminated that they look like fairground rides rather than a three-hour lift or drop for container ships. Next to the opposite bank is a giant construction site for the third phase of the project.

With spotlights everywhere and dozens of giant cranes illuminated by red, green and orange lights, workers labour in what could pass for the film set of a Hollywood science-fiction movie. Most breathtaking is the hydro-electric plant in the middle of the dam, which spews out a thundering cascade of water that churns up the river below.

Although the eulogy of the local media - "The Three Gorges project is showing the whole world a miracle" - is perhaps rather over the top, it is undeniably a remarkable feat of engineering. I cannot help wondering why this is so rarely talked about outside China. If the dam had been designed by a modern-day Isambard Kingdom Brunel, rather than Chinese communists, would we be celebrating it as a work of genius?

The answer is probably no. In the developed world, it has been a long time since engineers were considered national heroes. But China is playing catch-up, and throughout the country, the landscape is being transformed by vast construction projects such as the diversion of billions of tonnes of water thousands of miles from the wet south to the dry north - a plan that dwarfs even the Three Gorges dam in the scale of its ambition.

From the limited experience of my trip on the Yangtze, I would say that the Three Gorges dam appears to be a success in Benthamite terms: among those I spoke to, a lot more people were happy than unhappy about the change in their lives. Like the scenery, their view has been transformed: impressive dams now vie with pretty gorges for their attention; the short-term business focus on economic development has overtaken the peasant concern for long-term environmental conservation.

It could yet all go horribly wrong. The government's tendency towards secrecy cannot help but raise the suspicion that the Three Gorges dam may still hold some dirty secrets. But for now at least, a lot of people like Huang - the phlegmatic farmer-turned-boatman - appear to be more than willing to go with the flow in the New China.

The Three Gorges: The world's biggest hydroelectric power project

The first proposals for a dam across the Yangtze were made in 1919, but it wasn't until 30,000 people were killed in the floods of 1954 that Mao Zedong called in Russian engineers to help design it. The communist leader wanted something that would not only protect people living along the river, but would generate electricity.

In 1970, the government gave the go-ahead for a dam at Gezhouba to provide electricity for the region, part finance for the Three Gorges project, and to give engineers a chance to work through any potential pitfalls in building the bigger dam.

Twenty-four years later, work started on the Three Gorges dam itself. It is the largest hydroelectric project in the world. When it is completed in 2009, the dam - costing an estimated $24bn (£14bn) - will hold back a 600km-long reservoir and, using 26 giant turbines, generate up to 18,000 megawatts of hydroelectric power - equivalent to 30 coal-fired stations (but obviously without the equivalent emission of greenhouse gases).

Ian Cluckie, a professor of hydrology at the University of Bristol who has recently returned from visiting the dam, says it has three principal functions: hydropower, flood mitigation and navigation. The project consists of a 2.3km-wide dam with a spillway at the centre, powerhouses (which contain the turbines) on either side, and new navigation locks.

Water began to fill up the reservoir in June this year and the current depth is 135 metres. This will rise to 175 metres, giving it a storage capacity of 39.3bn cubic metres of water when the dam is completed in 2009. At that stage, the reservoir will have an area of more than 1,000 sq km, 630 sq km of which will be newly-inundated land.

The spillway is part of the dam's flood defence. "The Yangtze floods, on average, once every 10 years in a big way," says Cluckie. "The central spillway is designed to carry safely past the dam flows of up to 117,000 cubic metres per second." This is a phenomenal amount of water - at full flow, the Thames only flows at 500 cubic metres per second into the sea.

By 2009, the powerhouse on the south bank of the river will contain 14 turbines in total (so far it has 12, which are already producing electricity). The north bank's powerhouse will contain a further 12 turbines. Ships passing the dam now have to be lifted or dropped by about 100 metres. The new five-tier ship lock on the north bank of the river will let ships up to 10,000 tonnes in weight pass through the dam for free in less than three hours.

Anyone in a hurry can use the ship lift, which takes only 45 minutes but will come at a price. It is expected that cargo traffic along the Yangtze will increase from 10m to 50m tonnes as a result of the safer passage.