In the mid-90s, the Hong Kong film industry ate itself alive. In 1993, it had produced a record 238 films and its doyen director, John Woo, was about to dive, twin guns aflame, through Hollywood's doors. Six years later, production had crashed to just 40 films a year and not even the local triad gangs could prevent their own films from being pirated: there were bootlegs VCDs on sale everywhere of Casino, a gangster pic about and financed by the notorious Macau hoodlum, "Broken Tooth" Koi.

What went wrong? It was partly the first wave of digital piracy and partly the Asian economic crash of 1997, but it was also what Wellington Fung – then producer about town, now the secretary-general of the Hong Kong Film Development Council – describes as a "natural cycle".

"Actually, the boom was not really healthy," he says, "because a lot of money came in for movies to fill the video racks. The quantity of productions went up, which meant the quality went down. The themes of the movies and the characters began to repeat themselves. Because the supply was so abundant ... what we called 'overproducing'. And the audience lost confidence in Hong Kong film."

So the golden age – when Woo, Ringo Lam and Tsui Hark seemed to effortlessly knock off miracles of motion, and the great action choreographer Yuen Woo-ping was calling the shots – is history. But the Cantonese industry has been staging a quiet comeback, and a delegation is in the UK for Hong Kong Film Week to tell us about it: they're following up last night's premiere of crime thriller Overheard 2 with screenings of recent fare every night this week. Annual output, encouraged by a new film fund, increased to about 50 films in the mid-noughties, with the rate climbing in the last couple of years to around 70. Fung says the new-school Hong Kong films, with directors like Johnnie To and Barbara Wong at the head of the pack, have a different slant: "They went less fantastic and more realistic in some ways. More into the inner search rather than the external beauty. We got sick of the so-called fantastic action films."

Maybe the Hong Kong film industry needs to be more grounded, more sanguine these days. It has to make tricky decisions about how to progress. About half of its annual 70 are co-productions with mainland Chinese partners; the other half are independent Hong Kong productions. The first could mean a bite of the juicy Mandarin orange, the huge Chinese film market everyone is eyeing up these days; the second, more flexibility to cut different versions (China-approved films can only exist in a single version) for different audiences, including one for the lucrative Cantonese-speaking market, comprising some 160-170 million, that exists in Hong Kong, Guangdong, Malaysia and beyond. Hong Kong producers have a big decision to make before they take a single step.

The irresistible kinetic force of Woo and co in the 80s and 90s seduced Chinese film-makers along with everyone else, and the Hong Kong industry is still seen as an inspiration to the latest generation. But its relationship with mainland cinema is also uneasy, and strewn with bureaucratic hoops to jump through: for one, all independent Hong Kong productions have to fight past the cold shoulder of China's foreign film quota, which seems a bit ungenerous considering it's all one country now.

With mainland film on the verge, in Fung's opinion, of a "renaissance", and Bollywood starting to flex its muscle in the west, you might have thought Hong Kong would get crushed in the middle. But the secretary-general seems calm about pressure from these rivals, and others: "I think Korea put us under pressure for a period of time. But now I think Korea is going into the cycle that we did: their costs have gone up and the quality down. They're falling into this kind of trap. Japan has been very steady over the last few years. But this kind of competition is healthy because we can take up the challenge and try to work to our strengths."

Maybe Hollywood could use some of that philosophical stance. You could argue that overproduction and declining quality are exactly what happened in LA when the DVD cash started flooding in in the noughties. Could the current sliding American cinema attendance be a precursor to a full, Hong Kong-style crash? It seems inconceivable, but maybe looking eastwards might be worthwhile insurance. Where Hong Kong once showed the world that performing a flying kick the length an entire room was possible, now it can proselytise the virtues of a sensible recovery plan.

Execute that well, and you can even start to look for glimmers of a second golden age. "Our film-makers themselves are looking for some kind of breakthrough," says Fung, "and hopefully they'll find something different. I think the audience are looking for something different, too, but they haven't seen anything groundbreaking yet."

• Hong Kong Film Week runs until Friday at the Prince Charles Cinema, London.

• What global box-office stories should we be writing about? How does Hollywood hawk its wares in your country? Let us know in the comments below …