China hawks its military wares on the world market. Peking says it's not joining arms race - just raising cash

A group of Middle Easterners paused before the camouflaged steel hull of an armored personnel carrier. They peered inside at the benches where soldiers sit as they are carried into battle. A few brief questions were asked of the technician who stood by the machine. ``The interpreter told me they were from Libya,'' said the slightly incredulous American representative from FMC Corporation, a defense conglomerate.

The setting for this interchange was at the Chinese pavilion of ``Asiandex '86,'' the first full-scale arms exposition held in China. For the first time, foreign and Chinese arms makers displayed their wares in public. The Libyans were inspecting a Chinese vehicle that had been fitted with an American-made FMC gun turret to create a jointly developed prototype - an equally unprecedented collaboration.

China's display of its own weapons, Premier Zhao Ziyang told a group of foreign defense industry representatives, is ``an outgrowth of China's opening to the outside world.''

Western defense officials who live here were amazed at the sight of Chinese officials eagerly handing foreigners glossy color brochures of, and detailed specifications for, their weapons. ``I was struck with the openness of the Chinese to discuss things,'' said one. ``Three years ago,'' another Western official said, ``you would not have seen any of this - it was all classified.''

China's new openness about its defense technologies has one clear motivation: the military's desperate need for cash.

``The Chinese sense that the more information they make available, the better chance they have to export,'' a Western defense official said. Through arms sales, Chinese defense industries hope to be able to earn the foreign currency needed to upgrade their backward technologies. The military is still dependent on Soviet-designed weapons of the 1950s and early '60s that were supplied to China before the breakdown in Sino-Soviet relations in the mid-1960s.

Spending for China's People's Liberation Army (PLA) is steadily decreasing, now estimated to be under 13 percent of the national budget. China aims to demobilize 1 million men and women by the end of the year, reducing the PLA to 3 million personnel.

``To compensate for cuts in the armed forces, we are improving the quality and technology sophistication of our weapons,'' Premier Zhao said. Its arms sales abroad pay for upgraded defense technologies China is seeking from the West - improvements then used to enhance the saleability of Chinese weapons.

China is now estimated to be the world's fifth-largest arms supplier after the United States, Soviet Union, France, and Britain. But it is a distant fifth. According to one estimate, Chinese arms sales amounted to between $1 billion and $2 billion last year. Even at that relatively low level, compared with the leading arms exporters, China's foreign-exchange earnings from arms sales are an important element in its efforts to modernize the world's largest military with a steadily decreasing share of the national budget.

While not disguising its desire to sell on the world market, China ``will never get involved in the arms race,'' Mr. Zhao said.

At the Asiandex show, the Chinese displayed an impressive range of products, from models of supersonic fighter aircraft, ballistic missiles, and nuclear submarines to actual examples of armored vehicles, anti-aircraft missiles, machine guns, and even electronic systems such as radars and computers that control guns. Some of these products have been shown overseas at selected arms shows in the past two years, but they have never been shown all together and in China.

The main market for China's weapons is among developing countries, where the low cost of their arms compensates for lack of sophistication. For third-world countries, says one Western defense analyst, ``they offer a product that works, is simple to maintain, at the right price - and they deliver right now.''

The main Chinese arms exports are aircraft, armored vehicles (mainly tanks), and light arms. Combat aircraft are among China's biggest single earners of foreign currency. According to the vice-minister of aviation industry, Wang Ang, China has sold some 300 planes and helicopters to about a dozen foreign buyers, mostly for military use.

The Chinese are still quite secretive about those sales, both their value and their destination. According to the London-based International Institute for Strategic Studies, China has been selling weapons mainly to third-world countries. Since 1982, it has made sales to Pakistan, Sri Lanka, Brazil, Iran, Iraq, Egypt, Zambia, Zimbabwe, and Somalia. The most controversial sales are those to both sides of the Iran-Iraq war. According to one Peking source, China at one time sold 260 battle tanks to Iraq and has become a principal supplier of arms, including fighter aircraft, to Iran. Chinese officials refuse to comment on the persistent reports of these sales.

Chinese jet fighters are modified versions of older-model Soviet MIGs. The China National Aero Technology Import and Export Corporation (CATIC) has been carrying out an extensive campaign to market these planes - including mounting displays at recent major air shows in Europe. Foreign aircraft are ``very good but very sophisticated ... and, therefore, very expensive,'' says CATIC export director Chen Lide, explaining the sales approach. For third-world countries, he continues, ``it is more practical to have Chinese airplanes which are also good and sufficient for their needs.''

The Chinese refuse to reveal their prices, but Mr. Chen says with some pride that foreign aircraft ``are not only a little more expensive - they are a lot more expensive.'' According to several Western industry sources here, the F-7M ``Airguard,'' the Chinese version of the Soviet MIG-21, an aircraft introduced more than 25 years ago, can be purchased for $3 million to $4 million. ``For the price of one F-16,'' says one US industry official, referring to the most advanced US fighter, ``you can buy five F-7Ms.''

CATIC has tried to make the planes more appealing by installing modern Western avionics, electronics systems such as radars and computers, to control weapons. The A-5, a Chinese version of the MIG-19 of which 140 were sold to Pakistan several years ago, is being modernized with avionics from Italy's Aeritalia. Under an agreement reached in July, the first prototype, the A-5M, will be ready by early 1988. A similar agreement two years ago put British avionics in the F-7.

While the Asiandex show was going on, the US Defense Department announced the Chinese signing of a contract to purchase 55 avionics kits for their newest fighter, the F-8II. The deal, estimated to cost $550 million, is the largest military sales agreement China has signed with a foreign country. The Reagan administration has already received congressional approval for the sale.

The American-equipped F-8IIs are destined for Chinese air force use. Only a limited number of the aircraft, in prototype form, now exist. But Western defense officials say that even before the contract was signed, the Chinese were offering foreign customers the possibility of purchasing the updated aircraft.

The Chinese desire for selected defense technologies brought some 150 foreign firms to Asiandex to try to sell their wares. French, Italian, and British firms were predominant with a small turnout of American defense firms. One Italian arms salesman expressed a common cautious view of the Chinese market: ``The questions are always technical and shows their professional expertise is high,'' he said. ``But their prospects for sales won't come till much later, perhaps many months in the future.'' Then he added with more candor, ``They want the technology, but they're not interested in buying the equipment.''