SEVERAL weeks ago, Robert Allen, the chairman of American Telephone & Telegraph Company, hosted a lavish banquet attended by the Chinese Ambassador to the United States in the company's New York headquarters. Mr. Allen and his top international executive, vice chairman Randall Tobias, toasted to the success of 16 Chinese managers who AT&T had been sending through American business schools to learn the tricks of western financial know-how.Despite the multimillion-dollar education program, and a long history of courting the Chinese with its own staff in the country, AT&T appears no closer than ever to winning large telephone equipment contracts there. AT&T has sold a mere 125,000 lines of telephone switches to the Chinese in recent years, while the Beijing government has bought more than a million lines a year from AT&T's competitors. The only sale AT&T has chalked up recently occurred over a year ago - and it was a computer system for the Xinhua News Agency, not a telephone switch. Switching systems sell for millions of dollars and take years to develop. That hasn't deterred giant AT&T, which garners worldwide more than $7 billion in sales from telephone switching equipment alone, and has been eying overseas markets in Europe and Asia with the keenness of a flyfisher after prized salmon. In China, the catch looks tasty. Zhu Gaofeng, vice minister of the Chinese Ministry of Posts and Telecom, visited Washington in June and told a group of American executives that China plans to add 15 million new telephone lines by 1995. Beijing's reluctance to buy telephone equipment from AT&T is one piece of a larger puzzle: a US trade deficit with China that topped $10 billion last year, and is an important source of tension between the two nations. Accusing the Chinese of blocking imports of American products, the Bush administration gave a visiting Chinese delegation a stern lecture on Aug. 22 and 23 about the country's reluctance to "buy American." The administration set a deadline of Sept. 30 for the Chinese to come up with a plan to boost imports or possibly face trade sanctions. The sale of telephone switching equipment is an example of the sticky, flypaper-strewn path American companies must traverse to achieve success in China. The problems began with an edict issued by the government's State Council in 1989. Called Directive 56, it ordered Provincial agencies to purchase switches from only three companies: Siemens of Germany, Alcatel of France, and NEC of Japan. Left out: AT&T. The official reason is that the three favored companies agreed to establish local switch manufacturing. "AT&T doesn't have a joint venture for switch products. We already have three: Alcatel, NEC, and Siemens," says Qian Yongming, First Secretary of Science and Technology with the Chinese Embassy in Washington. AT&T, however, does have a joint venture in Shanghai that makes transmission equipment, the nuts-and-bolts hardware that carries telephone conversations over wire or optical fiber. But AT&T admits that local manufacturing of hi-tech switching equipment is still a touchy issue with the Chinese. "When the subject has been raised by the US government trade officials, the Chinese say they want to limit the number of companies in the network, and wants those who are committed to local manufacturing," says Chris Padilla, AT&T's manager of government affairs. But he claims only Alcatel among the three has actually planted a firm manufacturing foot in Chinese soil. There's evidence that Chinese manufacturing is not the issue. Northern Telecom, a Canadian competitor with no local manufacturing, has delivered 300,000 lines and has an equal amount on order, according to Edward Lucente, senior vice president of marketing. The Chinese "are looking for an excuse to add a fourth supplier," Mr. Lucente said after meeting with securities analysts in New York in May. Many China analysts say the issue is simple: cheap money. The State Council favors other suppliers because of the availability of government-backed soft loans. Since the Tiananmen Square incident two years ago squashed US enthusiasm for China, loans have been hard to come by. Ken Wickett, loan officer for China with the US government's Export-Import Bank, says three conditions were tacked on to China loans after Tiananmen: certainty the Chinese have agreed on the contract; evidence the business would be lost without the loan; and clearance from the State Department on human rights grounds. All this adds up to a "go-slow" approach, he says. "The fact of the matter is most foreign manufacturers are able to compete by offering soft loans to China. Northern Telecom has loans from Canada, Alcatel from France, and Siemens from Germany," claims Mr. Padilla of AT&T. "We, as Americans, don't have those loans available." One American government official, who spoke on condition of anonymity, declares flatly: "A lot of telecom projects [in China] have gone forward with concessionary financing." However, Swedish switch company Ericsson disagrees. Torbjorn Ihre, president of Ericsson's US arm, says the company sold mobile phones to several Chinese coast provinces in a contract financed by Japan. The Chinese are faced with what could be a test case. Last month, AT&T bid to sell switching equipment for three cities in a large telecommunications project covering some eight Chinese provinces. Padilla says the company was the low bidder on two of the three contracts. "That would be a step forward for us" if AT&T won the contracts, he says. Although the other bidders haven't been revealed, they are likely to include Siemens, Alcatel, and NEC.