DESPITE recent legislation to protect intellectual property rights, company executives and Chinese officials say counterfeiting continues unchecked in China. Mr Michael Blakeney, the managing director of Alfred Dunhill, said China was ''our number one potential problem in the world''. Mr Ernest Lau, area manager for Adidas International Hongkong, said: ''The counterfeit problem is a bit out of control . . . As China opens up, we see more and more.'' Mr Blakeney and Mr Lau were among dozens of foreign corporate executives and Chinese officials at a Beijing conference on implementing commitments China has made to protect intellectual property rights since signing a Sino-US memorandum of understanding on the issue more than a year ago. Both officials and executives say the intellectual property laws themselves are adequate, although less stringent than many had hoped. Earlier draft laws had been watered down in the end for ''some internal reasons'', said a Chinese official. However, the major problem is not with the laws, but with enforcement. Western executives do not doubt Beijing's commitment to protecting trademarks, patents and copyrights. Nevertheless, enforcement is difficult in the provinces because of ignorance, lack of manpower, local protectionism and sometimes the complicity of officials. China reportedly had 116,000 cases of counterfeiting last year. Among them were cases involving 165,800 tons of counterfeit chemical fertiliser, 60 million packets of fake cigarettes and 1,000 tons of counterfeit pharmaceuticals. There are two sorts of counterfeiting. One stems from ignorance on the part of entrepreneurs who simply do not know that copying a trademark is illegal. ''For example, some Chinese businessmen think Sprite is the name of a product, not a brand name,'' said Mr Wang Tianxiang, of the China Trademark Service Agency. He said violations made in ignorance accounted for an estimated 20 to 30 per cent of the total. Mr Blakeney said: ''People in the south may think this is something you do in a market economy.'' Other violations are intentional, and are often masterminded by unscrupulous businessmen from Taiwan and Hongkong who have moved their counterfeiting operations into China because of stricter regulation at home and because of the cheap labour on the mainland. Mr Wang said that between 50 and 80 per cent of trademark violations involved a Hongkong or Taiwan connection. Mr Blakeney said 80 per cent of mainland violations of the Dunhill trademark were organised in Hongkong or Taiwan. A senior executive of a Western pharmaceuticals company said such businessmen played ''on the naivete of the Chinese . . . The Chinese are victims of Hongkong Chinese and Taiwanese.'' Local officials are often unaware of the seriousness of the violation, are sometimes themselves corrupt, or may simply want to protect local entrepreneurs. Mr Gareth Davies, of Pinkerton Consulting and Investigation Services, which organised the Beijing conference, said: ''Maybe in their hearts, they [local officials] don't want to be too severe.'' Mr Blakeney said his company was currently losing GBP10 million to GBP20 million (about HK$118 million to HK$236 million) a year because of mainland counterfeiting. He said losses would be even greater if the counterfeiters were capable of better quality workmanship. Some counterfeiters even put the Dunhill label on items such as track suits - which Dunhill does not itself make - for export to Russia. ''This damages the Dunhill image,'' Mr Blakeney said. Once a violation is discovered, it can take up to six months for the Chinese bureaucracy to organise a raid. By that time, the counterfeiters may already have stopped their illicit activities or moved elsewhere. While Chinese police are brought in to conduct raids, action is usually initiated by the trademark owner itself, or investigators such as Pinkerton. Seventy per cent of Pinkerton's business involves infringements of intellectual property rights around the world. Normally, punishments are meted out by administrators, a quicker process than a court hearing, but one less likely to mean severe punishment. ''We have no experience of litigating because the view is it's not on to go through the courts and nail a company,'' said Mr Blakeney. Ms Rhonda Steele, Mars Inc's marketing property manager for the Asia-Pacific region, said her company had carried out five successful raids against mainland counterfeiters. The counterfeiting was stopped, but Mars was never awarded any compensation. Chinese officials say that they do sometimes award compensation. But one official involved in trademark protection said: ''When smaller companies are involved, we would be killing them to ask for compensation.'' Maximum fines are twice the amount of profit obtained from counterfeiting, and copiers face jail sentences of up to seven years. ''Personally, I think this is not strict enough,'' said a Chinese official. Mr Wang said Beijing wanted to protect intellectual property rights ''to prevent the market from becoming chaotic'', and to give foreign businessmen confidence that, if they invested in China, their trademarks would not be stolen.