But Francesco Sisci, a senior researcher at the Center of European Studies at the Renmin University of China, who has been tracking Vatican-China relations for two decades, said there was still some "fine-tuning" to be done before a deal could be signed.
"There is steady progress, but it won't happen overnight," he said in a telephone interview from Rome. "People at the Holy See are positive, the Chinese are also positive, but it is not like they are ready to sign an agreement."
Nevertheless, lay Catholics in Hong Kong reacted with concern.
"A lot of people like myself look to the Holy See as one of the strongest defenders of religious freedom and the Catholic faith," said Kenneth Chan Ka-lok, an associate professor at Hong Kong Baptist University and a pro-democracy activist. "To me, this is disturbing. I don't think it sends the right message."
The Catholic Church in China was divided for decades between the China Patriotic Association, whose bishops were appointed by the state, and underground churches with bishops appointed the Vatican. Although the pope formally "abolished" that divide in 2006, divisions continue to dog the Catholic community in China.
This month, it emerged that the Vatican had asked two of its bishops in China to stand aside or step down in favor of bishops appointed by the Chinese government. Reuters reported that the Vatican agreed to recognize five out of seven "illegitimate" bishops who had been appointed by China.
A senior Vatican official said that, under the deal, the Vatican would have a say in negotiations for the appointment of future bishops and described the situation as still "like a bird in a cage, but the cage will be bigger," Reuters reported.
The prospect of a deal sparked an emotional appeal by retired Hong Kong cardinal Joseph Zen, who traveled to Rome this month to meet the pope and went public with his concerns Monday — that the Vatican was "selling out" the Catholic Church in China. He was subsequently rebuked by the Vatican for implying that the pope was not fully supportive of the negotiations.
Chan said that he supported Zen's remarks, arguing that a deal would be a betrayal of the Catholic faithful's sacrifices in China and comparing it to Vatican concessions during the era of communist rule in Hungary and what then was Czechoslovakia that left Catholics there feeling demoralized.
"The Church needs to demonstrate what is right and what is wrong, what is good and what is evil," he added. "It's quite naive to assume that joining hands with the Communist regime, literally leading to the abolition of underground churches, would help to improve religious freedom in China."
A report on China's religious revival by Freedom House in London judged that Catholics in China face "moderate" levels of persecution, while Tibetan Buddhists, Uighur Muslims and practitioners of the Falun Gong spiritual movement face "very high" levels of persecution.
While many of the country's estimated 12 million Catholics can attend Mass relatively freely, seminary students have to attend classes in Marxist theory, and Communist Party cadres exercise close control and surveillance over the Patriotic Church, experts say.
In an interview with Vatican Insider published this week, Cardinal Pietro Parolin, the pope's secretary of state, argued that the dialogue was about "finding realistic pastoral solutions that allow Catholics to live their faith and continue together the work of evangelization in the specific Chinese context."
He said he was confident that Catholics would trust in the Lord and the pope as "the sure reference point for grasping God's plan" in the present circumstances. "We trust that the Chinese faithful, thanks to their sense of faith, will know how to recognize that the action of the Holy See is animated by this trust, which does not respond to worldly logics," he said.
In China, a priest at St. Joseph's Cathedral, the largest in the city of Tianjin and part of the state system, said believers would "of course" welcome the deal. "It is good for the country, the people and believers," said the priest, who gave his name only as Zhang. He said it would give them an "international partner" and remove obstacles to the practice of their religion.
The Catholic Church may also feel under pressure from the rapid growth of Protestant churches in China, experts said.
But Chit Wai John Mok, a writer on Vatican affairs and a doctoral student in sociology at the University of California at Irvine, called the removal of two Vatican-appointed bishops "outrageous" and said Catholics in Hong Kong were "mostly shocked and disappointed" by the news.
It was heart-rending, he said, to see Zen, the retired cardinal who had devoted his life to defending free worship in China, publicly rebuked by the Vatican for criticizing the prospect of a deal.
"The secretariat of state of the Holy See may think the deal would be a step towards conciliation, yet it would be more likely to create new cleavages, opening up new wounds and leading to further schism," he said. He argued that it was naive to think Catholics in China would accept state-appointed bishops whom they see as collaborators with the Communist Party.
Chinese President Xi Jinping, he said, "has repeatedly made it very clear that the party would not loosen any control over religions, so there is no way a deal on paper can improve religious freedom for the Church."
If the Vatican does establish full diplomatic relations with the Chinese government, Beijing would demand that it sever those ties with Taiwan. The Vatican is one of only 20 states that recognize the government in Taipei.
Five Taiwanese politicians announced plans this week to travel to Europe and seek an audience with the pope to express their concerns, Taiwanese media reported. Anna Kao, head of the Department of European Affairs at Taiwan's Foreign Ministry, said that her government was aware of the dialogue. But she also pointed out that even if a deal is reached over the appointment of bishops, huge differences would remain between the Vatican and Beijing over religious freedom, according to local media.
Taiwan's ambassador to the Holy See, Matthew S.M. Lee, said that the Vatican was engaging with China to ease the suffering of those attending underground churches and said dialogue was in line with God's will, according to a news report reposted by his embassy.
Liu Yang contributed to this report.