China Cancels U.S. Deal for Modernizing F-8 Jet : Military: Shelving the $550-million program signals an important break in the two nations’ strategic ties.

China has told the United States that it is pulling out of a $550-million arms deal that has been the linchpin of efforts at military cooperation between the two countries over the last decade, the Pentagon confirmed Monday.

China’s decision represents an important break in the series of strategic and military ties it had built with the United States. Although President Bush suspended military sales and deliveries to China after the pro-democracy movement was crushed in Beijing last June, he had carefully allowed work to continue on long-term military programs.

Under the mammoth arms program, known as Peace Pearl, Grumman Corp. of Bethpage, N.Y., has been working with the Chinese air force to modernize China’s F-8 jet fighters, providing the planes with sophisticated electronics, navigation and radar equipment.

It was by far the largest in a series of arms deals concluded between Beijing and Washington during the 1980s, a time when China and the United States saw strategic benefits in cooperating with one another against the Soviet Union.

“The People’s Republic of China has decided not to proceed beyond the development phase of the F-8 avionics modernization program at this time,” a Pentagon spokesman, Lt. Cmdr. Edward Lundquist, said in response to queries from The Times. “ . . . This was terminated by the Chinese. They made the decision (that) they didn’t want to proceed with the production phase.”

U.S. officials declined to say what reason China had given, and the Chinese Embassy in Washing ton would not comment. But sources in the U.S. defense industry and Washington’s diplomatic community said that China has been concerned for some time about the prospect of burgeoningcosts on Peace Pearl.

“This was China learning about the American defense industry and its cost overruns,” said one source.

Some sources speculated that China’s decision may also reflect internal politics and a cooling of interest in doing business with the United States. Several years ago, the Chinese air force, led by Cmdr. Wang Hai, overcame considerable resistance from more conservative leaders when it persuaded the regime to seek American help in modernizing Chinese planes.

The Peace Pearl program was first offered to China by Secretary of Defense Caspar W. Weinberger during a trip to Beijing in 1983. The deal was concluded amid considerable fanfare three years later.

On April 8, 1986, when the Reagan Administration announced the huge arms deal, the Pentagon said that the sale would help U.S. foreign policy “by helping to improve the security of a friendly country which has been an important force for political stability and economic progress in Asia and the world.”

After the People’s Liberation Army’s deadly assault in Tian An Men Square last June, Bush suspended not only arms sales but military contacts with China. At that time, about 40 Chinese military officers who had come to the United States for the F-8 modernization program were told to stop reporting for work, both at Grumman’s Long Island facility in Bethpage and at Wright-Patterson Air Base outside Dayton, Ohio.

However, last fall, as part of a series of overtures to the Chinese leadership, the Bush Administration allowed the Chinese military officials to return to work on the Peace Pearl project in the United States.

“We can’t proceed without the participation of some Chinese engineering and maintenance personnel,” Lundquist said at that time.

The Pentagon spokesman said Monday that the development phase of the project will end sometime this fall. He said he is unsure what the impact will be on Grumman or whether there will be any layoffs. A Grumman spokesman, Miriam Reid, said she has been instructed to refer all questions to the Defense Department.

China’s F-8 fighters are based on the design and technology of Soviet MIGs. One Asian diplomat here said he believes Grumman ran into problems in seeking to fit its advanced electronics onto the Chinese planes.

“The MIG didn’t have enough space in the nose for this kind of equipment,” this diplomat explained. “That’s one of the problems you have sometimes when you seek to overhaul old planes instead of buying new ones.”

The program originally had called for the modernization of 55 Chinese jets, at a cost of about $10 million per plane. But one defense industry specialist said that by some recent projections, the cost overruns could have run as high as 35% to 40%, for a total of as much as $200 million extra.

Lundquist could not say Monday how much of the total cost China has paid for development work.