Behind a high gray wall in southern Peking, there is a brisk business in rosaries, jade crucifixes and religious art. Several yards from this bustling courtyard, hundreds of Chinese are kneeling inside the Cathedral of the Immaculate Conception, singing a morning mass in Latin.

Just a few years ago, this scene might have prompted an attack by ax-swinging Red Guards. During the Cultural Revolution, Chinese Christians were pilloried as "monsters and demons," their churches and Bibles destroyed, their clergy forced to work at hard labor.

Today Catholics and Protestants are flourishing quietly in a new period of religious toleration. With the Communist Party's blessing, parishes are reopening and Bibles are being published. New bishops are being consecrated and priests once again are performing baptisms and taking confessions.

At the Gothic-style cathedral in south Peking last month, 4,000 Chinese Catholics crammed into five different masses to celebrate the Assumption of Mary, more than twice the number of worshipers who came when the service was resumed two years ago.

"Today it's all right for someone to believe" in religion, said Tian Chongren, a Catholic Church official. "The Communist Party doesn't believe in God, but no one forces us to believe in communism. There's freedom both ways."

Despite the clear signs of religious vitality in China's more relaxed political state, many observers believe the new freedom to worship is a fragile right in a communist nation where atheism is official policy and Christianity is considered an alien import.

The future is especially uncertain for the tiny Catholic community, which the Chinese government holds up to even greater scrutiny because of the historic ties of Catholics everywhere to one of China's bitterest foes--the Vatican.

Faced with the job of organizing a billion people, China's leaders consider the pope's efforts to govern the spiritual life of a segment of the Chinese population to be a rude and possibly destablilizing interference. Officials also oppose the Holy See's practice of appointing bishops loyal to papal authority.

An even more sensitive issue is the Vatican's continued recognition of Taiwan as "the Republic of China," directly defying Peking's claim to be the sole legal government of China. The communist leadership views this as further meddling in China's internal affairs.

Eight years after the Communists took power in 1949, the new government forced China's Catholics to break ties with the Vatican as a condition for the church's survival. The Patriotic Catholic Church was set up to govern church affairs and ensure its autonomy from Rome.

Despite the ban on Roman Catholicism, underground sects still loyal to the pope reportedly continue to meet clandestinely throughout the nation. Members with access to shortwave radios and foreign newspapers are said to search for papal pronouncements, which they translate into Chinese, publish and distribute among themselves.

But most of China's Catholics adjusted easily to their church's breakaway status. As with most originally Western institutions, they have developed an indigenous Chinese style after nearly 25 years of isolation from the Holy See's liturgical and ritual rulings.

Chinese Catholics not only continue to celebrate the mass in Latin, they still abstain from eating meat on Friday and blame the Jews for killing Christ. Adhering to the government's rigid birth-control program, priests absolve women believers for using contraceptives and for undergoing abortions or sterilization.

"Chinese Catholics should not be under the influence or the control of foreigners," said Zhai Yuzhen, 63, a retired factory worker whose Catholic family goes back several generations.

As a further sign of its independence, the Patriotic Church protests the first and the loudest whenever the Vatican appears to be overstepping its bounds in China or stepping up its quarter-century campaign to win back what the pope calls "the lost flocks of China."

When Pope John Paul II tried in June to make the first papal appointment to China in 26 years by naming Chinese Bishop Dominic Tang as archbishop of Canton, the Patriotic Church called the appointment illegal, branded Tang a traitor and "lackey of the Vatican" and fired him from his Chinese posts.

"Gone are the days when the Holy See controlled the Chinese church," said a statement drafted by church leaders at the time. "Guided by the Holy Ghost, we will run the church better along the road of independence."

This blend of nationalism expressed by Chinese religious and political officials today is typical of China's reaction to outside church influences ever since the first Jesuit missionaries arrived in the 17th century and tried to prove their spiritual superiority by showing off the latest advances in European astronomy.

Surviving the often harsh treatment of China's imperial courts and later backed by Western gunboats, Catholic missionaries built a sizable following in the major cities, claiming more than 3 million faithful by the time of the communist takeover.

There has been no recent count of Chinese Catholics, although they make up a tiny fraction of the population. The decentralized style of the state-sponsored church makes a national census difficult, and there is no way of knowing how many papal loyalists still worship in secret.

Most of today's Catholics, however, trace back their faith several generations to the days when Western missionaries rewarded each new convert with six silver dollars.

When asked why they practice Catholicism today, many believers cite family tradition as the reason.

For other Catholics, the church's rituals, dynamism and ideals provide an attractive alternative in an austere society where communism has failed to answer many problems and where the communist messiah, Mao Tse-tung, caused much suffering.

Except for isolation from the Vatican, Chinese Catholics in recent years have been able to conduct their religious activities with a wide latitude ensured at least for the time being by a moderate Chinese leadership that is trying to gain respect abroad and tranquility at home to foster economic development.

Priests who only recently were released from labor camps have returned to their parishes and donned vestments to say daily masses.

Although Catholic laymen are barred from joining the Communist Party and thus relinquish the only ladder to success in China, they generally enjoy freedom to practice their religion within the limits set by the state association, including a prohibition against proselytizing.