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Just outside Xining, the capital of Qinghai Province, a long red brick wall follows the Tibetan highway for several miles. In the middle of the wall an iron gate stands open. A sign declaring ''hydroelectric equipment factory'' is positioned neatly in the driveway.

It is only on the far reaches of the wall that the real identity of the ''factory'' becomes apparent. Here, high above the highway are watchtowers, built of the same neat red brick as the wall. Inside stand the neatly dressed soldiers of the People's Liberation Army, armed with rifles with fixed bayonets.

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Seventeen miles southeast of Xining is the Kumbum Lamasery, the birthplace of the founder of Tsong-K'apa, the yellow sect of Buddhism. Kumbum Lamasery is one of China's six major remaining lamaseries, which are monasteries for priests and monks in the Lamaist religion.

Each day 460 lamas move slowly through the rituals of their religion. They wear or clutch the saffron hats shaped like a cock's comb that gave the sect its name.

Except for 100 young novices, each of these lamas has spent years in Chinese labor camps, some for longer periods than they have spent in the lamasery. Northwest China: a natural prison

Qinghai Province is known for its labor camps. Nearly 930 miles from Peking, its isolation and barren landscape have been used as a natural prison for those not so popular with Peking since the founding of the People's Republic 35 years ago. During the turmoil of the Cultural Revolution (1966-76), when 2 or 3 million are believed to have been incarcerated within its vast boundaries.

A report released in September by Amnesty International, the London-based human-rights organization, has confirmed that the current regime in China - considered by many Westerners to be relatively liberal because of its policy of opening to the West - is still using the lao-gai, or prison-camp, system to deal with thousands of political prisoners. Many of these have been tried in closed trials or simply sent to a labor camp at the discretion of a local police official.

The 130-page report, ''China: Violations of Human Rights,'' said that ''prisoners of conscience'' - people detained for exercising their fundamental human rights and have not used or advocated violence - were not being given fair trials and were frequently subjected to abuse, despite claims to the contrary by the Chinese leadership.

Amnesty says it has received information from former prisoners about people being held in constant solitary confinement for four years and other ill-treatment, including the use of hand shackles and beatings, particularly of those awaiting trial.

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''Although the ill-treatment of prisoners is prohibited by the Chinese law, prisoners have been subjected to punishments which constitute ill-treatment according to international standards. . . . Amnesty International believes that some of these punishments constitute cruel, inhuman, and degrading treatment,'' the report says. Amnesty tries again

Amnesty first petitioned the Chinese government about human-rights violations in 1979. Since then it has written two letters to the Chinese premier, Zhao Ziyang, and one to the Chinese President, Li Xiannian, on the issue of the death penalty. None of the letters have been acknowledged by the Chinese government.

In its report, Amnesty gives detailed case studies of 15 people it believes to be prisoners of conscience, held on political grounds for nonviolent actions. However, it is unable to estimate how many such prisoners exist in the Chinese penal system. And it does not disclose in the report the number of individuals it has petitioned the Chinese government to release.

''Amnesty International's information on the detention of prisoners of conscience in China remains incomplete. . . . Amnesty believes that the prisoners of conscience of whom it is aware are only a small fraction of the total number in the People's Republic of China,'' the report said.

In Gansu Province, the deputy director of the provincial Labor Reform Administration, Zhai Hui Jing, reluctantly admitted that up to 20,000 people are now undergoing ''labor reform'' in his province alone.

Mr. Zhai stressed that this is much smaller than the numbers in other provinces and represents a drastic reduction since the days of the ''gang of four'' during the Cultural Revolution. From prisoner to governor

Thousands of prisoners have in fact been released. In 1979 and 1980, the newly moderate leadership under Deng Xiaoping decided to rehabilitate some of those who had been placed in jail during the Cultural Revolution and others like Chue Shu who were lost in the first extreme purges of Communist China.

Huang Jing Bo is one such person, given his freedom after 11 years in a jail in Liaoning Province in northeast China. He was imprisoned after he had allegedly opposed two slogans that were popular during the Cultural Revolution and at the height of the Mao cult: ''Mao Tse-tung's thought is the zenith of Marxism,'' and ''One sentence of Mao Tse-tung thought is worth 10,000 sentences of ordinary thought.''Today the suntanned and urbane Mr. Huang is governor of Qinghai.

Huang is willing to speak of his province's prison camps, but complains that his province has an unfair reputation as the ''Siberia of China'' simply because it has more camps than any other province.

He stresses that many people have been released from the camps in the past four years: ''The number of people serving labor reform is much smaller than it used to be.''

It is not difficult to see that what really obsesses the governor is the development of Qinghai into a focus of the Chinese economy by the turn of the century. The camps remain an integral part of this drive for development, their significance only heightened by the central leadership's determiniation to develop the area.

Both Qinghai and Gansu are rich in barely exploited mineral deposits. Both provinces already use prison labor in the mines that exist.

Profits and free labor

The lao-gai's starvation diet and ''struggle sessions'' - in which prison authorities and fellow inmates verbally reconstruct a prisoner's life, seizing on every detail as proof of his ''stinking and rotten'' character - eventually produce docile prisoners.

According to many former inmates, it is these sessions - carried out sometimes two or three times a day - that are so efficient in crumbling an individual's resistance. They were more effective than direct physical abuse - although many camps are believed to keep their charges on a near-starvation diet.

Docile inmates are an ideal source of free labor.

''The Chinese reached a goal that had eluded even Stalin - making forced labor a paying proposition,'' wrote Jean Pasqualini, a French-Chinese, in his book ''Prisoner of Mao,'' an account of his seven years in the Chinese prison system. ''China must surely be the only country in the world where prisons turn a profit.''

''For all but a handful of exceptional cases the prison experience is total and permanent. The men and women sentenced to reform through labor spend the remainder of their lives in the camps, as prisoners first and then as 'free-workers' (who are retained or placed in camps) after their terms have expired. They are far too important to the national economy to be run with transient personnel.''

Who gets sentenced, and why

Mr. Zhai, deputy director of the Gansu labor reform administration for the past five years, claims that prisoners are now being sent to camps only if they have committed a criminal offense.

''Those who engaged in smashing, looting, and beating of course have been sentenced,'' he said of the ''leftists'' and ''gang of four'' supporters currently undergoing reform through labor.

Under Chinese law, ''counterrevolutionary'' activities - which cover an unspecified range of behavior - are considered a criminal offense. Last year during an anticrime campaign, counterrevolutionary crimes became punishable by death.

According to Amnesty, Chinese prisoners of conscience currently include Roman Catholic priests imprisoned for their alligience to the Pope; Tibetans who support the Dalai Lama, their exiled leader; young dissidents who wrote criticisms of the Chinese leadership on ''Democracy Wall'' in the late 1970s; people who petitioned the government over personal or public grievances; those accused of having passed ''state secrets'' to foreigners; and those who oppose the regime's reforms and policies, who are usually referred to as ''leftists.''

Education through labor

In 1980, despite the move toward establishing a legal code, regulations were published providing for ''education through labor'' - a shorter version of lao-gai. Under this system, local officials could sentence youths to a labor camp for a maximum of six years without any form of trial or sentencing.

''Discretion is used,'' Zhai said. ''Sometimes they send lesser criminals to labor camps to give them an opportunity to turn over a new leaf.''

Those mentioned in the regulations as eligible for such treatment include those who ''have no decent occupation, who have behaved like hooligans, counterrevolutionaries, and antisocialist reactionaries . . . who refuse job assignments . . . make trouble, and refuse to mend their ways.''

Last year an anticrime campaign, which led to thousands of executions, is also thought to have provided fresh labor for many of China's camps. It is believed up to 10,000 people were arrested during this campaign.

One of the major concerns of the Amnesty report are the recent mass and sometimes public executions which have taken place as part of the crime campaign - despite a law passed as recently as 1979 banning public parades or executions of criminals.

Now, 45 crimes are punishable by death - twice as many as in 1981. Included are ''counterrevolutionary offenses,'' a broad term which has been interpreted to mean anything from befriending a foreigner to selling transcripts of a dissident's trial, which the authorities claim are public anyway. A demand for human rights In September, Amnesty International released the report,''China: Violations of Human Rights'' The main body is a memorandum that Amnesty presented to Chinese government in Febuary 183, which called for the release of a number of prisoners of conscience and improvements in protecting basic human rights in China. The changes included: * Revising the criminal laws by which prisoners of conscience are interned. * Repealing a 1957 law reinstated in 1979 which provides for the sentencing of prisoners of conscience to up to four years in a labor camp without trial. * Establishing safeguards against the practice of prolonged detention of people arrested on political grounds before they are formally charged. * Introducing the practice of publishing charges. * Making trial procedures conform to international standards, particularly the right to be presumed innocent until proven guilty. * Introducing safeguards against the ill-treatment of prisoners, especially before trials, including the right to regulr visits and unbiased legal representation. * Taking steps toward the abolition of the death penalty.

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