EVEN as the Clinton administration's National Security Council draws up an inter-agency plan to curtail the smuggling of illegal immigrants from China, a quiet but fierce battle is being waged within the US Government over the issue of how to evaluate thousands of asylum applications based on fear of China's stringent population control policies. It is still unclear who will prevail in the end, the few arguing that the basis for such claims, if genuine, constitute political persecution, or the many who argue that coercive family-planning policies - no matter how draconian - are not covered by theUS asylum umbrella. This debate, carried on through internal memos, regulations and Congressional testimony, has not only created sharp divisions within the Immigration and Naturalisation Service, which oversees all immigration matters. It has also paralysed the judicial process precisely at a time when immigration judges are coming under severe political pressure to adjudicate cases from the People's Republic of China quickly. The Golden Venture, the cargo-freighter loaded with more than 300 would-be Chinese immigrants that ran aground near New York last month, is a case in point. Immigration judges in Baltimore and Philadelphia have ''received instructions from Washington to process 170 of the cases within 120 days,'' according to an attorney who spoke with two of the three judges in that district. ''Even under normal circumstances, that is wildly unrealistic - only 17 of 22 similar Chinese cases were adjudicated in the same district during the previous five months.'' But this already cumbersome process, slowed down by the need for translators and documents from abroad, has been brought to a virtual standstill in some instances due to disagreements over policy and interpretation of law. The conflict over how to assess asylum claims based on Beijing's one-child-per-family policy has been gathering critical mass since January 1990, when the Justice Department issued an ''interim rule'' mandating that an asylum applicant who establishes a well-founded fear that he or she will be forced to undergo abortion or sterilisation, or will be persecuted for failing to do so, may be granted asylum on the ground of ''persecution on account of political opinion.'' THIS regulation was reinforced several months later in an Executive Order (No. 12711) issued by George Bush, which provided for ''enhanced consideration'' for individuals fleeing or fearing such persecution. But there was a problem. Mr Bush's Order seemed to conflict with a 1989 legal precedent - known as Matter of Chang - routinely invoked by immigration judges to deny precisely that kind of asylum application. ''Implementation of the one-couple, one-child policy of the Chinese Government is not on its face persecutive and does not create a well-founded fear of persecution,'' the ruling reads. The conflict between Matter of Chang and the Executive Order did not emerge immediately, in part because the number of relevant claims remained small, and in part because the Order did not define what kind of ''enhanced consideration'' asylum applicants could expect. But in late 1991, the General Counsel of the INS, Grover Joseph Rees, issued the first in a series of internal memoranda - which carry the force of instruction to immigration court prosecutors - designed to ease the burden of proof and broaden the grounds for asylum claims based on China's coercive family planning policy. By his own admission, Mr Rees has been waging a lonely war. Arrayed against him are his law enforcement colleagues in the INS, and State Department Officials, who are highly sceptical of most asylum claims from the People's Republic of China, especially those from the Fuzhou area of Fujian Province, the source of almost all immigrant smuggling. Though few will say so openly, most INS officials favour repealing Mr Bush's Executive Order altogether. But Mr Rees' efforts have been very effective. So effective, in fact, that many of the country's small corps of 33 immigration judges are angered by what they perceive as his undermining the judicial process. When Mr Rees spoke before an annual meeting of the judges a month ago, he was ''bombarded'' with criticism, according to one of the judges present. The complaints were two-fold: that he was single-handedly trying to determine immigration policy, and that he was undermining the position of the prosecutors under his authority, but allowing their fatally weakened cases to be heard nonetheless. The deadlock between Mr Rees' office and some judges has become so serious that the Board of Immigration Appeals - the highest court in immigration matters - has taken a very unusual step. The Board has forwarded two test cases to the Attorney-General, Janet Reno, that effectively force her to choose between Matter of Chang and the legal arguments advanced by Mr Rees. Ms Reno's decision could have a huge impact on thousands of pending asylum cases. A Bush holdover, Mr Rees' days as General Counsel are probably numbered, according to sources in the Justice Department. But even if his departure is imminent, he will leave behind an important legacy that could reinforce the changes he made. BEFORE leaving office in January, then - Attorney-General William Barr signed a regulation authored by Mr Rees that would effectively void Matter of Chang, and compel the INS to grant asylum to any citizen of the People's Republic of China who could substantiate a reasonable fear of persecution in relation to China's population-control measures. Ms Reno's decision would also be rendered irrelevant if the regulation, called a ''final rule,'' goes into effect. But there is a catch. Even though it has been signed, the final rule is in a kind of bureaucratic limbo. It does not go into effect until published in the Federal Registry, but it cannot be rescinded by a current Attorney-General. It's fate is still being debated. Mr Rees has made the point, most recently in Congressional testimony this week, that the actual number of PRC nationals that have been granted asylum is small, and that only a fraction of those are granted on the basis of coercive family planning policies. Of 1,563 asylum cases closed by immigration judges in 1992, for example, only 481 resulted in asylum. Of those, more than half were on the basis of political or dissident activity, rather than fear of sterilisation or forced abortion. At least as many asylum cases are processed each year administratively, rather than judicially, but a sampling of 330 cases from last year - complete figures are not available - show than an even smaller percentage were granted by that means. The numbers involved, however, could rise dramatically very soon. The INS appears to have obscured what would be a very revealing statistic: the number of PRC nationals who have applied for safe haven under George Bush's 1990 Executive Order. Designed to offer protection to Chinese students in the US in the aftermath of the Beijing massacre of June 1989, the Executive Order extended temporary residence until January 1, 1994 to all citizens of the PRC who could prove they were in the US prior to April 11, 1990. It was expected that 60,000 to 70,000 Chinese, mainly students, would qualify. But when it became clear that those qualifying for ''Executive Order status'' would eventually receive much-coveted ''green cards'' - i.e. permanent residence - something unanticipated began to happen. Thousands, perhaps tens of thousands, of Chinese who had entered the US illegally, many after the cut-off date, filed applications for Executive Order status. Their applications were supported by false or fraudulent documents such as back-dated bank statements, medical or rent receipts, and telephone bills. This black market in fake documents thrived until last year, when it was no longer plausible for applicants to claim that they had been in the US before April 1990. The INS will not reveal the number of Chinese who have sought Executive Order status, but sources close to the INS suggest it could be as high as 250,000. If so, this would prove a great embarrassment, and could prompt investigation as to why so many dubious claims were processed. Beginning this week, the INS began accepting applications for converting the temporary status to permanent residence. Assuming the numbers involved are significantly higher than has been revealed thus far, the agency will be faced with a dilemma. If it simply grants permanent residence to all the applicants, it will become obvious that many, if not most, entered the country illegally after the deadline and took advantage of the Executive Order. If, on the other hand, the INS attempts to screen out the dubious applicants - those, for example, that did not enter the US with a valid visa - the rest will simply file asylum claims, further burdening a system that is already overwhelmed.