THIS LITTLE BOOK on a big subject happens to contain some of the best recent writing on China. Orville Schell has an eye for color, irony and nuance which is extraordinary. By vividly describing the Chinese whom he meets and their hopes for a better life under an increasingly decentralized and decollectivized economy, Schell takes some of the mystery out of China and humanizes it. This is all to the good. As one China scholar, Harry Harding, of the Brookings Institution, has noted, American attitudes toward China have undergone regular cycles of romanticism and cynicism which cloud our vision of that huge nation. Or as Schell himself describes it, to the West, China has been "anything from a billion red ants threatening to destroy the world to a billion staunch socialists, the only hope for its salvation."

If Schell is correct, many of us may currently be in danger of romanticizing, or idealizing, China's recent economic reforms. The ABC News Nightline program earlier this winter called the reforms China's "new capitalism." Editorial writers, meanwhile, delight in arguing that China is "going capitalist." But Schell reminds us of how complicated things really are, pointing to some of the mines that could be lying there, waiting to explode as China's economic planners blaze new experimental trails. The author provides a counterpoint to the "Oh, how wonderful, how exciting!" current in American thinking about China, which coexists with an equally forceful "Oh how terrible!" school of thought.

As Schell puts it, "Western dreams of China, whether of business or revolution, have fallen terribly short of their hoped-for realization. Yet the dreaming goes on -- and once more, as in the 19th century, the West, from vantage points like the Great Wall Hotel (in Peking), is dreaming of China as an endless sinkhole for Western capital and goods; a trading partner par excellence, a billion customers just waiting to drink our Cokes, wear our jeans, buy our factories, power plants, and weapons."

The author correctly asserts that "it is all too easy to forget that what is actually out there is a relatively impoverished country that has historically been either economically self-sufficient or unable to eke out the money to buy an appreciable amount of Western goods; a country that even in 1981 had to back off from its massive modernization program, which over- committed it to purchases from abroad. History in this sense is not a source of hope; for in the past Western dreams, like Chinese dreams, have more often than not been disappointed."

SCHELL does not deny that Deng Xiaoping's reforms have brought some dramatic economic progress, including "a surge in over-all agricultural production." But he worries about an inequitable distribution of the gains. He fears that free market practices may cause a decrease in grain production, an increase in grain prices for city workers, and uncontrolled inflation. The author shares the concern of William Hinton, an American farmer who worked in China for many years and who now fears that in their eagerness to "privatize," the Chinese are throwing out everything which was of value from the past, including the collective maintenance of dam, irrigation, and flood control projects.

Schell is also concerned that in their zeal to acquire Western technology and the latest in Western luxuries, the Chinese are also, inadvertently, allowing the development of an underworld class of young opportunists, speculators, and criminals. Schell describes well those among China's youth who are unemployed or who have lost confidence in the communist system. One young hustler whom he meets in a private restaurant in Peking boasts that for cold cash, "We can get you anything you want. Clothes from Hong Kong, tape recorders, cameras, watches, televisions, radios."

More poignant is his account of a Saturday night dance sponsored by a Taishan county labor-union organization. Schell ends up chatting with a Miss Wu, who asks him to teach her how to dance. She tells him that she loves to practice dancing and listen to Western pop music in the evening as a diversion from her boring job in an electrical wire factory. Before long every youth in the room is looking at Schell and a European friend "with great intensity, as if they expected us to momentarily unlock the riddle of the universe."

"The open door policy may have meant the mastering of Western science and technology to China's leaders, but to these Taishan youths craving a little foreign culture and glamour, it meant learning how to dance and having some fun."

The dancing had its limits. When Schell's European friend burst into a jitterbug and some of the bolder Chinese boys began to laugh and clap, a cadre in a gray Mao suit sprang into action:

"He jumped to his feet, walked over to the performance, and motioned my friend to cease with a palms- forward fluttering gesture, the kind someone makes trying to dissipate a bad smell."

But on one important point, let the reader be warned. Schell's writing is so engaging that one might be tempted to think that this is the whole story. China is so big and moving so fast that it's doubtful any one writer can grasp the whole. And readers should be aware that there are more optimistic views concerning China's economic future. But this slender book is a quick and readable introduction to today's China, even if not the final word.