When capitalism came knocking, China's leaders reluctantly opened the door—unprepared for the burst of free expression that followed. Dorinda Elliott finds havens of artists whose courage is as thrilling as their creativity

Factory 798 is a run-down monstrosity a half-hour from central Beijing. The Bauhaus-style complex was built by East Germans in the 1950s, at the height of the Cold War and Socialist fraternalism—back in the days when Chairman Mao exhorted the Chinese to "dig ditches deep" and the most glorious task was to be a laborer. A bright-red slogan above a vaulted former workshop still proclaims, "Long Live the Great Leader Mao Zedong!" but it's only a relic of a bygone era. History is on fast-forward here, and Factory 798 is known these days—to those who are in the know—as the coolest art space in China.

The factory went bankrupt, a casualty of capitalist experiments that have forced lumbering state-run industries to make money or shut down. There are still a few functioning facilities where workers stamp out low-tech ceramic diodes for simple electrical gadgets. But most of the ramshackle compound of workshops, offices, and canteens has been taken over by another post-Maoist vanguard: pioneering artists. Studios and small galleries have been carved out; chic cafés and bars have been opened by young entrepreneurs. The main factory space, with a soaring arched roof, is now an exhibition space. On any given day, a range of in-your-face art—from huge, superrealist nudes to surreal photography, sarcastic spoofs on socialist realism, abstract oils, and risqué sculpture—is on display.

This is the other Beijing, the polar opposite of the ancient Forbidden City. Tour buses don't go to this gritty, edgy spot, and yet there is perhaps no quicker and more direct way to experience urban China—and the downright revolutionary changes sweeping it—than by visiting its burgeoning art world. In addition to the spectacle that is Factory 798, there are more and more small, privately run galleries tucked into the narrow lanes of China's principal cities. In a country where profit rules, artists are forgotten heroes, clinging to an antiquated idea that culture counts. But as they are discovered by foreign collectors, even they are getting caught up in today's get-rich fever. You see reflected in the artists' works everything from the bleeding edge of cool China, with its punk clubs and fake Prada, to the old China in which grannies still clean chamber pots in the crowded, twisting streets behind the glassy shopping malls.

Socialism and capitalism lock horns on a daily basis here, creating highly political art. And so Beijing, the political center, is the place to start. When I lived here in the late 1980s, young artists were just beginning to challenge the Communist party with satirical political works, and the propaganda czars regularly shut down their quasi-underground shows. Today, it is almost as if the artists have been shot out of a cannon, suddenly freed. Unbridled experimentation is producing important works—many have made it into museum collections around the world—and, of course, some junk, as artists try to find a new plotline in their dramatically changed society. "In the past, artists were very passionate. They had an enemy," says Xu Zhen, a twenty-seven-year-old installation artist in Shanghai. "The enemy has disappeared. Now we have to deal with a broader world."