BEIJING -- Now that trade negotiators have defused another time bomb between Washington and Beijing, the flood of American automotive investment in China will resume. Still, patience is the watchword as China's torrid economic growth of the early 1990s starts to slow.

The June Auto China '96 automotive exhibition here became Asia's second largest auto show after Tokyo. Chinese consumers, who still only dream of owning a car, indulged their fantasies gazing at Ferrari F40s and BMW 740s or even the Chevrolet Suburban, which is almost as large as the modest homes tucked within Beijing's network of back alleys known as hutongs.

"You can read all the books or watch all the documentaries, but there's no way to understand what's happening in China without being there," says Robert A. Parmann, vice president of engineering for Walker Manufacturing, which has launched an exhaust system joint venture in Dalian, about 375 miles (600 km) east of Beijing.

But while China's Ministry of Machinery Industry still predicts passenger car production will quadruple to 1.2 million vehicles a year by 2000, there are signs that such rosy forecasts may need rethinking.

Existing assembly plants are equipped to build nearly 1 million cars annually, but last year they produced roughly 325,000. First Auto Works-Jinbei lost 250 million renminbi ($30.5 million) last year.

"Compared to two years ago when both Beijing Jeep and Shanghai Volkswagen were selling every vehicle they could make at retail prices, the picture is changing," says Kenneth DeWoskin, University of Michigan professor of international business and Asian language. "There's now a substantial surplus inventory and prices have dropped 20% to 25% from last year. Many of the sales projections for '95 have proven to be too optimistic."

Even China's Family Car Strategy for the 21st Century, a government report obtained, translated and published by Ward's Communications, concedes that a broad middle class won't begin to emerge until sometime between 2005 and 2010. Today the government's first priority is to rein in inflation that exceeded 24% in 1994, more than twice the government's target of 10%.

Government agencies have found their credit restricted for purchasing cars and trucks. "So purchases of vehicles by state-run agencies is way down, but the market for personal-use vehicles is just not appearing yet," says Mr. DeWoskin, who also advises Coopers & Lybrand on China's economy.

Lower prices should help.

Indeed, based on a table of motor vehicle prices in nine major cities compiled by Xinhua News Agency and published in the Word's Focus on China June newsletter, the price of a Shanghai VW Santana 2000 is now 144,000 renminbi ($17,266) in Shanghai, down from 165,000 renminbi ($19,784) in June 1995.

A Tianjin Charade TJ7100U is selling for 100,000 renminbi ($11,990) in Shanghai, compared with 130,000 renminbi ($15,587) last summer.

"Far more capacity has been approved than the market can handle today," says Franc J. Krebs, president of Beijing Jeep Corp. Ltd., of which Chrysler Corp. owns 33%. Still, Beijing Jeep is planning to build 40,000 Cherokees this year, up from 25,000 in 1995. Mr. Krebs also is planning to boost output of the more basic BJ2020 from 55,000 to 60,000.

Only 4% of all vehicles sold in China are privately owned. Most are purchased by the vast network of government agencies that employ most Chinese workers.

But with per-capita annual income currently about $400, only crude symbolic evidence of a mass automotive retailing system and no widespread system for issuing consumer credit for automobiles, the boom in privately owned vehicles may be a decade away.

General Motors Corp. still is awaiting a go-ahead for its $1 billion joint venture to produce up to 100,000 Buick Regals annually with Shanghai Automotive Industry Corp. Meanwhile, a feasibility study continues.

"The uncertainty over intellectual property rights has caused major difficulties," says GM China President Rudy Schlais, "but the project registration that was submitted at the end of 1995 is working its way through the ministries."

Mercedes-Benz AG also is waiting for approval to start construction on plants in Zhanjiang and Hainan Island where, together with Nanfang South China Motor Corp., it plans to build 60,000 of its Viano minivans annually and 100,000 diesel and gasoline engines. Neither Mercedes' van nor GM's Regal is small enough or affordable enough to qualify as a "family car."

Based on the Family Car study, a family car is generally envisioned as a 3-door hatchback with a 1.3L engine, antilock brakes, seat belts, fold-down rear seats and optional air conditioning -- all for a sticker price of about $7,500, or about 62,500 renminbi, which is less than half of what you would pay today for a Volkswagen Santana.

Frustration is the entry fee to this vast market of 1.2 billion where there is now one vehicle for every 700 people -- minuscule in comparison with one vehicle for every 1.5 persons in the U.S. And despite the recent trade agreement, there is no guarantee that intellectual piracy will stop in our lifetimes. But the stakes are simply too high for both the U.S. and China not to push forward.

"Do we really believe we can change overnight a culture that thinks in terms of dynasties while we think in terms of two-year election cycles?" GM Chairman John F. Smith Jr. asks rhetorically. "Do we really think that by isolating China from the U.S. we would improve by one iota any of the conditions cited by MFN (Most Favored Nation trading status) opponents?"

Volkswagen, which through partnerships with First Auto Works in Changchun, northeast of Beijing, and Shanghai Automotive Industry Corp. built about 180,000 cars last year in China, remains the most effectively positioned of Western automakers. It sold more of its Santana sedans last year (159,766) in China than its total passenger car sales in the U.S. and Canada combined (154,233).

Xuehai Li, a former GM engineer and now president of Global Technology, a Troy, MI, consulting firm working with a variety of U.S. companies doing business in China, says it's reasonable for any American company to expect certain standards of conduct, but there are dynamics in Chinese culture and economics that the West just doesn't understand yet.

"From the Chinese viewpoint, they never really practiced or have been ruled by law," Ms. Li says. "They're just now learning how to pass and enforce laws.

"People in the West think that because there is a powerful central government, what that government says will happen. And that's just not the case. Much of the country is functioning in chaos. China is much more a country of entrepreneurs than most Westerners realize."

From poor families selling breakfast from a folding table on the hutongs or back streets of Beijing or Shanghai to the factories of Guangdong province churning out pirated compact disks, everyone is trying to find a way to survive in an economy of rising expectations.

Dana G. Mead, chairman and chief executive officer of Tenneco, whose automotive unit has two joint ventures in China, agrees with GM's Mr. Smith that it's time to stop reviewing China's MFN status every year because it escalates tensions that only can damage American business interests in the long run. He'd prefer to see a multi-year agreement in exchange for lower tariffs on imported technology.

"It's one way to get the relationship settled down," Mr. Mead says. "We're probably going to get some decent results on the human rights front, but it is only going to happen very quietly. They don't want to have the debate in public."

One of the bigger challenges for automakers and parts suppliers is keeping control of their technology at the same time that they're sharing it liberally. It's a pre-requisite for finding a joint-venture partner.

"It's obviously much easier to copy software and videotapes than it is to copy a car," says Mr. DeWoskin. "But what happens when you turn over all your technology and patents and you're still not admitted? That's essentially what has happened to McDonnell Douglas (Corp.)"

The aerospace giant literally taught Chinese engineers how to build commercial jetliners, beginning in the early 1980s. But every time it thought it had a major commitment, China's government requested that more of the content come from state-run businesses, while giving lucrative contracts to rival Boeing Co. Fifteen years later, McDonnell has little to show for its tireless efforts and its huge investment.

On a more recent project, the Chinese government has failed to pay for 40 MD-90 jetliners, costing the company $100 million in finance charges, according to The Wall Street Journal reports.

Ironically, none of this will do much to deter North American, European and other Asian automakers from continuing to pump money into what is shaping up as the industry's 21st century Gold Rush.

The real prize belongs to the manufacturer that can develop the Chinese equivalent of the Model T. Says Ms. Li, "Someone needs to design a car that can be produced and sold for about $4,000 (33,360 renminbi)."