Microcosmic circulation (小周天) is the entrance practice of more esoteric Taoist meditative practice. In modern China, this practice has been mystified by popular Wuxia fictions (武俠小說). Settings are in China's Dynasty periods and typically the heroes do not serve a lord, wield military power or belong to the aristocratic class. They are often from the lower social classes of ancient Chinese society. Wuxia heroes are usually bound by a code of chivalry, that requires them to right wrongs, especially when the helpless or the poor are oppressed. Oftentimes, after opening the two main chi-channels (the back Du [督] channel and the front Ren [任] channel), the hero will be elevated to a very higher level of proficiency of internal martial strength. And accomplishing this openings is through the practice of microcosmic circulation. Nowadays, it is a belief among some chi-practitioners that opening the two channels can greatly improve one's health (which belief is especially prevalent among those practitioners who haven't opened their channels yet!)
These two beliefs (one of internal martial strength and one of health benefit) are not necessarily wrong, but the results have been over-promised.
Many systems of meditation require their practitioners to focus on the third eye (i.e. between the eye-brows). The objective is to control one's restless mind and emotion. In the process, chi will be created in that triangular area (two physical eyes plus one third eye). In Taoist practice, the next step is to direct that initial chi to the mid-point in one's abdomen (dantian 丹田). This process is also known as internal gaze, whereby, chi at dantian will be stimulated to grow through the direction of chi at the third eye. And as chi is built up in the dantian, the muscles around the perineum will be stimulated to be synchronized with breathing. More chi will then be gathered between the dantian and the perineum.
As with any energy system, when energy is built up in certain point of a system, it will tend to flow to other points of lower energy intensity. In Taoist meditation, the practitioner, after sensing that chi is strong enough at the dantian, will consciously direct the chi, with the help of reverse abdominal breathing, to flow (against natural flow) up the spinal cord, pass the top of the head and drop back to the abdomen. Through this process, chi will be distributed and equalized in the body, and the practitioner shall further build chi in the abdomen, until it is ready for another upstream flow again.
In summary, first of all, we need to to meditate at the third eye, then direct chi to the dantian, increase chi there and step by step direct it to move upstream and finally drop back to the dantian. This is the gist of microcosmic circulation.