(FORTUNE Magazine) – WESTERN business's romance with the People's Republic of China is over. A Peking conference sponsored by Chinese advertising officials on how to crack ''a market with more consumers than America and Europe combined'' was nearly canceled this spring for lack of registrants. Three or four years ago it would have been packed with Western executives. Most companies have made the jolting discovery that a big, booming Chinese market is a long-term hope at best and increasingly looks like a myth. Despite flirtations with the techniques of capitalism, the People's Republic clings to a creaky Communist system that is incompatible with a market economy. China is still little more than an ambitious Third World country: backward, bureaucratic, and greedy. The Chinese are carrying the ''buy low, sell high'' watchword to extremes. Short of foreign exchange, they are, for example, pressuring international suppliers to sell power plants below cost. They are trying to barter coal at inflated prices in exchange for locomotives. Many Western companies are quietly thinning out personnel or even closing offices in China because of the outrageous prices charged for basic services. Says an American executive: ''Peking is the only city I know of that's more expensive than Tokyo.'' Wages for Chinese employees are extremely high by local standards, though workers do not benefit. A Western company typically pays a government bureau $286 a month for a driver. The driver gets just $36 of that. And then there is what the Chinese politely term hao cho. It means literally ''nice benefit from a business deal''; in reality it translates into payoffs. Profitability is proving elusive, even for those taking a long view. The Western partners of the few joint ventures that are making money find it maddeningly difficult to get their profits out. Though China needs almost everything and has grand five-year economic plans, its buying power is limited. Says John M. Stitch, general manager of Texas Instruments Asia: ''Companies got hypnotized by the notion of one billion consumers, but a lot of Chinese don't have electricity and aren't going to buy computers.'' Adventuresome companies that set up manufacturing plants in China are finding that low productivity and bureaucratic meddling wipe out any cost advantages they might have expected. Though Chinese factory workers take home less than $50 a month, many more of them are needed to get the job done than in neighboring Asian countries. Unrealistic pricing of raw materials also sabotages projects. Beatrice wanted to make orange juice concentrate in Canton but gave up after China offered the most expensive oranges in the world. As a result of the spreading horror stories, China is not getting the flow of foreign capital that its leaders expected. Egypt, among other countries, has attracted more investment than the People's Republic in the last five years. New commitments dropped 48%, to $3.3 billion, last year. U.S. companies have signed agreements to invest a total $1.7 billion in China -- about 1% of U.S. investment in East Asia. Even that modest figure is exaggerated. Most American commitments are for hotels that eventually revert to state ownership, oil exploration (which has turned up no significant discoveries), and deals that may yet evaporate. Total American equity in Chinese manufacturing ventures is at most $50 million, equivalent to General Motors' investment in a single joint venture in South Korea. China trade is no bonanza for the U.S. either. Two-way trade with China last year came to a mere $8.4 billion -- about the same as with Singapore, which buys more from the U.S. than China does. THE JAPANESE are even more cautious about investing in China. They are eager to sell cars and color TVs there, but they do so mostly by exporting from Japan. The biggest investors are Overseas Chinese, mainly from Hong Kong, who use personal relationships and perseverance to get around the country's onerous restrictions (see box, page 89). Chinese bureaucrats celebrate business agreements with effusive toasts to ''friendship and mutual benefit.'' Then, when the Western chief executive has gone home to announce his deal, the Chinese partners usually explain to those left behind that ''our authorities want to make a few small changes.'' Those revisions, says Michael J. Moser, a China business specialist in the Hong Kong office of the U.S. law firm Baker & McKenzie, often turn out to involve everything agreed upon in hard-fought negotiations. Even if bureaucrats leave the contract relatively intact, the Chinese joint venture partners often bend or ignore the details. Remy Martin thought it had an exclusive deal to make a wine called Dynasty in Tianjin, then found that its joint venture partner, a government enterprise, had launched a rival Chinese brand with grapes from the same vineyard. Despite closely drawn joint agreements, unilateral interference by the Chinese is common. Government officials arbitrarily removed the general manager and his deputy from Parker Seal Co.'s joint venture making industrial seals in the eastern Chinese province of Hubei. Peking keeps promising to improve business conditions, but delivers little. Borg-Warner, among others, has simply shelved its Chinese plans. The company was negotiating joint ventures to make plastics, pumps, and auto components but has decided that it could not earn money under China's tough and erratic terms. As U.S. Commerce Secretary Malcolm Baldrige put it to Chinese officials recently, foreign businessmen ''need some certainty so they're not just flying blind.'' A lot of the Western disappointment with China, of course, springs from unrealistic expectations. Says Thomas Tucker, president of Asia-Pacific operations for General Electric: ''Many of our divisions thought China was going to bring a great increase in sales, and that didn't happen. The whole U.S. saw China that way. There was bound to be a let-down.'' GE, in fact, has done relatively well in China, selling more than $500 million of aircraft engines, power equipment, and locomotives over the past seven years. Lately though, says Tucker, even GE's sales have come to ''a sputtering halt.'' Adds Michael Moser, the Hong Kong lawyer: ''The people who are saying that it's awful now are the ones who thought China was going capitalist.''

Even top Chinese officials don't seem to know these days how arguments over the ideological purity of various economic reforms will come out. Less than three years ago Peking proudly announced that managers of state-owned factories, rather than local party chiefs, would decide on staff levels, wages, and pricing. This year Peking postponed, perhaps forever, turning that pledge into law. Plans to end price subsidies for urban consumers are on hold, too. And scattered attempts to revive stock markets, which grabbed headlines in the West, have been squelched. An American Sinologist in Hong Kong says, ''Economic reforms will not work unless the Chinese make drastic changes in their political system.'' While professing to woo foreign businessmen, factions within China's quarrelsome Communist party are waging a vigorous campaign against ''bourgeois liberalism,'' Western influence, and capitalist values. Long before the latest ideological guff, businessmen ran into trouble with China's grand strategy. The supposedly open door has swung mostly in one direction, out. Though foreign manufacturers are attracted by the country's big domestic market, Chinese authorities have insisted from the start that most ventures focus on exports. PEKING DEMANDS that almost every enterprise generate a foreign exchange surplus, even though most products made in China are not very competitive in world markets. Instead of perfecting products at home, gradually gaining economies of scale, and then tackling export markets, as Japan and others have done, the People's Republic is trying to become an instant exporter. U.S. Secretary of State George Shultz, who was once a business school dean, has tried to explain the absurdity of that strategy to China's minister of foreign affairs, Wu Xueqian. Recounting complaints of American businessmen, Shultz told Wu in a recent letter that Chinese policy ''fails to take into account the common experience of all other countries which have modernized.'' Getting and keeping contracts increasingly involves corruption. The Chinese take a moralistic, self-righteous stance in public, but privately they can be as venal as anyone else. The price for greasing a deal includes cash, TV sets, and trips abroad. A seasoned, Chinese-speaking American manager who represents multinationals in Peking says, ''Many negotiations are just a sham. The deals are cut on the side.'' During bargaining for a computer sale, he adds, Chinese officials came to his hotel room one night and offered to give him the rival proposal from a Japanese supplier for a bribe of $400. Another U.S. business negotiator in China says, ''The problem is getting worse. It's not Iran-style corruption, where people want $1 million socked into a bank account in Switzerland, but it's a lot of annoyances -- demands for hiring a relative or putting money into a secret bank account in Hong Kong.'' Moreover, the People's Republic has found ways to institutionalize what would otherwise be conflict of interest, or worse. China Technical Corp., a state-owned consulting company with offices in Bethesda, Maryland, offers to help U.S. companies bid for machinery sales deals and turnkey factory contracts in China. Clients pay a consulting fee, plus a commission when successful. China Technical, in fact, is part of China National Technology Import Corp., which makes the purchases. A U.S. specialist on China trade, who learned the hard way, says, ''If you don't take the consulting service, there's no chance of getting a contract.'' Likewise, a Peking-based law firm called Great Wall, which some international companies hire to help prepare joint venture contracts, is manned by the legal staff of the ministry of foreign economic relations and trade, which also approves major deals. Perhaps most frustrating to international businessmen is the disunity of the Chinese economy, in which each enterprise acts like a separate nation striving for self-sufficiency. Says one American executive in China: ''The only thing that a Chinese factory doesn't have is its own army.'' No plant likes depending on another, so Chinese telecommunications companies want to make all their own chips and components. In this environment, reminiscent of China in days when warlords controlled chunks of the country, foreign businessmen go crazy trying to get Chinese factories and government departments to cooperate with one another. THE TRIBULATIONS of American Motors, the largest U.S. manufacturing investor in China, illustrates the difficulties. Beijing Jeep, AMC's joint venture, stopped assembling vehicles for two months last year because the Chinese refused to allocate foreign exchange it needed to buy components abroad. The trouble was rooted in unrealistic terms AMC signed nearly four years ago. Under Chinese pressure, the automaker agreed to develop a new model in China, using lots of local parts, to be exported to surrounding Asian countries. Don St. Pierre, 45, an AMC manager who is president of Beijing Jeep, now says: ''Who knew anything about the Chinese auto industry then? Nobody knew how the supply situation would develop or that the foreign exchange crunch would be so severe.'' And, he adds, AMC's partner, a Chinese government enterprise that had been making a knockoff of the Russian Gaz jeep for two decades, ''didn't know how the auto industry worked either.'' St. Pierre, who was not part of the original negotiating team, later discovered that Beijing Jeep had no foreign exchange to buy equipment for making new engines, axles, and body stampings. Says he: ''We had always thought that foreign exchange would come from the Chinese, as part of their investment. AMC didn't intend to put up any more money.'' American Motors had invested $16 million, half of it in cash and half in machinery, for a 31.4% stake in Beijing Jeep. By appealing to Premier Zhao Ziyang and going public about its plight, Beijing Jeep got its foreign exchange. The company also persuaded the Chinese to drop their demand for an entirely new vehicle and accept the Cherokee -- a pricey U.S. model -- as Beijing Jeep's main product. The Cherokee retails for $19,072 in China. The company has also exported a small number of stripped- down Cherokees to Central America and the Caribbean. For the last two years, the operation has been profitable. To soothe AMC further, Peking selected it as the first foreign company to receive special tax breaks and other benefits earmarked for investors in ''advanced technology.'' Still, the battle was hardly reassuring. Says a U.S. diplomat in Peking: ''When a company has to go to the premier for help, it's really in trouble.'' Beatrice chose the outskirts of Canton, a couple of hours from Hong Kong by train, for a $10-million joint venture making soft drinks, snack foods, and ice cream. The idea was to earn foreign exchange by selling products in Hong Kong. But despite the closeness, Beatrice's soft drinks, bottled under such Chinese names as Mei Jin and Jin Jin, have made little headway among sophisticated Hong Kong consumers accustomed to Coke, Pepsi, and other international brands.

On top of that, Beatrice's costs in China are so high that it has trouble offering competitive prices in Hong Kong. Admits E. Charles Longley Jr., president of Beatrice Asia: ''Exporting to Hong Kong has not been a material part of our business.'' As a result, the joint venture is making money only in Chinese currency, which it cannot send back to the U.S. in the form of dividends. Hewlett-Packard has invested $5 million in a joint venture to assemble computers in Peking, only to discover that Chinese customers with foreign exchange -- mainly high-level government agencies and big manufacturing enterprises -- find it more prestigious to buy imported computers. In response, the company is taking tougher management stances on other questions. Says Suresh Rajpal, director of marketing for Asian operations: ''We're going to hire people we need, not have people dumped on us anymore. Before, we got a lot of warm bodies.'' Few Western companies get worse treatment than international banks. The state-owned Bank of China has two full-service branches in New York, while seven U.S. banks have liaison offices in China but are not allowed to do any banking. Citibank, Chase, and others each spend about $350,000 a year keeping representatives in Peking. The bankers have nothing much to do; they spend their days making contacts among Western businessmen and Chinese officials in the hope that eventually they will be able to operate. ''The Chinese must think we're somehow making money to put up with these overheads,'' says one U.S. banker. The government has even ordered American exporters to negotiate letters of credit with the Bank of China in New York. And China's first syndicated loan in New York (for $150 million) is being handled by Schroder Bank & Trust, owned by the Industrial Bank of Japan. WITH SO MANY hassles, why do companies persist in China? There is still that long, long view. Says William O. Lee, vice president of Allied-Signal China, a maker of automotive, aviation, and other products: ''We're just planting seeds now.'' The hardest nose probably belongs to Christopher C. Morton, who heads the representative office in Peking for Ecolaire, a manufacturer of coal-mining equipment and power generators. He uses what he calls his ''two plus two equals one-half'' formula. Says he: ''It takes twice as long and costs twice as much as doing business anywhere else, and the return is about half what you get elsewhere.'' If a deal still looks good on those terms, he says, if perhaps long-range factors can help justify it, ''then do it.'' A few American companies still seem naively optimistic. Electronic Data Systems, a subsidiary of GM, has signed an $11-million joint venture to offer data processing networks in China. It could be a tough sell, since every ministry and factory has a penchant for keeping its own data secret. Nonetheless, George O'Keefe, the company's China manager, says, ''We're very bullish.'' All the potential that corporations see in China can be realized only if the Communist regime in Peking can agree on a direction for its economy and then stick to it. Lois Tretiak, a China specialist with Business International, a consulting firm, says, ''Companies should weigh the decision to invest in the China market just as harshly as when they're going into Nigeria, Brazil, or India.'' This attitude could help persuade China to stop neutralizing its cost advantages in labor, land, and materials by overpricing them to foreign ventures. The downsizing of dreams about a big China market would be healthy for both Western businessmen and the People's Republic.