The river twisted mistily through a great cleft in the mountains. Beside it, blue silhouettes of forested slopes smudged into the haze and it seemed that a landscape scroll painting had come dreamily to life in front of me. Standing on steep steps leading to the White Emperor's hilltop palace, I was enjoying the majestic sight of the opening of the Yangtze river's Qutang Gorge – and jostling for space among a group of Chinese tourists.

Many of my fellow onlookers were brandishing ¥10 notes and I rather wondered if this was in order to secure a good position. But my guide, Bing, laughed at what was evidently a preposterous suggestion and explained that this is such a revered beauty spot it features on the back of that denomination bill. She pulled one out of her purse so that our small group could compare and contrast.

You can't really convey misty drama on a banknote – even photographs don't quite capture the ethereal mood of that view of the Qutang Gorge. It was because of the trails of white fog here, swirling auspiciously in the shape of dragons, that a warlord in about AD25 established a base on this north bank of the Yangtze. That he was subsequently known as the White Emperor was no reflection on his complexion but because of the mist, said Bing. (That wasn't really what she was called, of course, but like many Chinese guides she had adopted a name pronounceable by Western tourists.)

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We climbed up past plaques of poetry and through an ornate archway to the palace, temples and gardens at the top of the hill. It was almost impossible to move without stepping into a photograph being taken by the cheerful throng of Chinese visitors. This is hallowed ground, Bing told us, because it is the setting of a famous story in Chinese history: in around AD220 the wounded hero-emperor Liu Bei lay dying here. With his last breath he entrusted his kingdom and his young sons to his loyal minister Zhuge Liang. The regent was a remarkable statesman and took such care in nurturing the royal boys that he wrote down instructions on how to be a good ruler. These are carved into a great white stone we had passed on the way up, Bing said.

She knew the words by heart having learnt them at school, as most children across the republic still do. I couldn't quite envisage British kids grappling with that: the treatise is the sort of Magna Carta of China – written nearly 1,000 years before the British document. I returned to my river ship in awe of the Chinese capacity for learning and feeling privileged to have been among people so enthusiastically honouring the ideals of a long-ago past.

The present seems altogether more tangled, codes of conduct far more equivocal, particularly concerning developments on the Yangtze. I was on a three-day river cruise from the city of Chongqing to the Three Gorges Dam. The world's largest and most contentious hydropower project was completed in July last year. During the 17 years of its construction, 13 cities, more than 140 towns and about 1,350 villages were submerged – complete with factories, mines and waste sites. Large new conurbations were rapidly constructed to replace the major sites now under water.

Open objection was voiced – largely from outside China. Meanwhile, supporters of the project point out that this has been a brilliant feat of engineering, creating an amazing water-control system. The dam is capable of generating as much energy as 15 nuclear power stations (some say 18); it has tamed a notoriously dangerous stretch of river (this part of the Yangtze used to cause devastation by flooding areas downriver); and it has resulted in the development of a huge reservoir about 640km long.

That reservoir runs pretty much from Chongqing to the dam. Along it are three gorges of legendary beauty that were previously navigable only by small boats. Now big ships, from cargo boats to cruise vessels carrying as many as 400 passengers, can purr through. With many landmark sites of China's history dotted along the banks, a trip through this reservoir offers an extraordinary insight into past glories and 21st-century innovation.

Bing told me that tourism here has been booming since the dam neared completion. Of course, she said, among local people the project had very mixed reactions: many of the older generation found it heartbreaking to have to leave their homes and relocate; but younger people tend to see the change as offering great benefits. Everyone has to accept that the dam is there now, she added pragmatically. Finished. Done.

I was sailing on the Victoria Anna, one of the seven Yangtze cruise ships operated by the American company Victoria Cruises. The 190 or so other passengers were a mixed assortment of Americans, Australians, Scandinavians, other Europeans and Chinese, who made up about a quarter of the total. Meals were a choice of Oriental dishes given an American twist here and there. Facilities included a small spa that I never saw anyone enter, a much used mahjong room, an acupuncture centre with attendant doctor who also ran dawn tai chi sessions and a spacious top terrace where passengers spent most of their time, watching the Yangtze world go by.

In this comfortably well-managed community we were told when to eat (dinners at 6.30pm seemed implausibly early, but turned out just right given our breakfast times); we were charmingly entertained each evening by the crew who served us sparkling Chinese wine (surprisingly good) and donned dancing costumes; and we were efficiently marshalled into small groups for our excursions, led by local guides.

On our first morning, I woke to a view of tower blocks looming through fog from the other side of the river. This was Fengdu. Newly rebuilt Fengdu, that is. Old Fengdu lay submerged way below our moorings. Work on the new city started in 1999 and it was a fully functioning centre by 2002. Yet little more than five years ago there were still people living in the old town, which was being dismantled around them.

This I learnt from our guide for the morning. She was taking us around one of China's most celebrated sites, the "Ghost City" above old Fengdu. As she led us to ever more ornate temples staggered up the hillside, she explained that this is China's capital of the Underworld, originally built about 1,800 years ago. It's where you come to pray for a peaceful afterlife.

My attention, though, was rather more on the here and now. I was spellbound by the face-off between ancient and modern. From terraces beside those time-honoured temples you look over the river to the new city. It is already five times bigger, our guide said, than the old Fengdu lying under the water below.

It was on our second morning that we visited the White Emperor's palace set high above the town of Fengjie, which we walked through on the way. The latter is, again, a brand new conurbation sitting above its drowned predecessor – only this time an ancient gateway and some of the walls were relocated along with the citizens before the rest of the old town was lost to rising water.

In the afternoon our cruise ship entered the Three Gorges – Qutang, Wu and Xiling – and we spent several hours gazing through swirling mist at a great parade of cliff and mountain scenery. We stopped for another excursion, clambering into elegant row-boats in order to explore one of the minor tributaries, the Shennong Stream. That night I struggled hard to stay awake until 11pm in order to watch our ship descending through the first of five enormous locks of the great dam area.

We set off early the next morning to explore the dam. It's the modern marvel of China, said our guide, Michael. We boarded a bus, proceeded along well-planted parkland and passed through stringent security. Bags and bodies scanned, we drove on and parked at a series of long escalators. A visitor centre at the top offers an exhibition area, souvenir shops and views over ship locks as well as a massive ship lift currently under construction. There's little aesthetic appeal in engineering tourism, but that's beside the point for most people arriving here.

Several big hotels and restaurants are being developed on the site, Michael said. It's going to be a major destination – largely for the domestic market. There were already great crowds of Chinese tourists clicking away zealously.

"The Three Gorges Project has made the long-cherished dream of the Chinese people come true," announced a huge plaque in Mandarin and English. That seemed the hollow language of old-time propaganda. But the pride of the Chinese visitors around me was palpably real.

Travel essentials

Harriet O’Brien travelled with Wendy Wu Tours (0844 288 5396; wendywutours.co.uk), which offers a three-day Yangtze river cruise as part of an eightnight private tour of China. The trip starts in Beijing and finishes in Shanghai and costs from £2,240 per person (based on two sharing), which includes all international and internal flights and other travel, accommodation in four-star hotels and on the cruise ship, selected meals, all guiding and a tourist visa.