The mass exodus of ethnic Chinese from Vietnam, which has worsened a serious dispute between Hanoi and Peking, marks the end of a long era of economic domination of southern Vietnam by that racial group.

Chinese preeminence in the Vietnamese economy was symbolized by colorful, crowded Cholon, the western sector of Saigon in South Vietnam, to which they gravitated. Cholon, with 700,000 residents - almost half the Chinese in all of Vietnam - was the financial and commercial heart of southern Vietnam.

The Chinese ruled the economy "from top to bottom," said former South Vietnamese economy minister Pham Kim Ngoe. They owned most local, private factories and processing plants except the pharmaceutical laboratories.

Chinese merchants established a labyrinthine network for distributing and purchasing commodities that covered virtually all South Vietnamese provincial and city markets. The buying and selling of rice - the staple food of Vietnam - was almost completely in Chinese hands.

Using their considerable wealth, some influential Chinese reached into the center of Vietnamese political power. A former South Vietnamese finance minister with a reputation for honesty recently recounted a confrontation he once had with a wealthy Chinese.He ordered the man to pay nearly 1 billion plastres - then equivalent to about $1.5 million - for tax evasion. The minister was urged by President Nguyen Van Thieu's brother, then ambassador to Taiwan, to drop the matter.

While the case was pending, the minister was dismissed in a cabinet reshuffle. "I lost to the Chinese," he said. Well-informed Vietnamese sources said the Chinese businessman had secretly financed Thieu's presidential campaign.

From the time they first arrived in Vietnam centuries ago, the skillful, hard-working and cohesive Chinese achieved great success in trade and business. Nevertheless, the boom period for them came after the French conquered Vietnam in the 19th century and granted them special economic privileges.

Under French rule, the Chinese enjoyed considerable autonomy, including control of their own schools. The French used the Chinese as intermediaries in the sale of French goods and the purchase of local products for export.

Chinese shops appeared at good locations in every downtown area from the largest cities to the smaller towns. Chinese migration to Vietnam grew significantly during this period.

After divided Vietnam gained independence from the French in 1954, the Chinese were in a predominant economic position. Realizing that economic mastery was as important as political sovereignty, leaders of both North and South Vietnam sought to restrict economic dominance by aliens.

In South Vietnam, President Ngo Dinh Diem forced all Vietnam-born Chinese to adopt citizenship and banned foreigners from various businesses including Foreign Commerce, the rice trade, transportation and retail food sales. Almost all Chinese took Vietnamese nationality and, Vietnamizing their names, remained kings of Vietnam's markets.

In an attempt to assimilate the new citizens into Vietnamese society, the Saigon government diected Chinese schools to follow the Vietnamese curriculum and to use Vietnamese as the principal language. Several naturalized Chinese were elected to the National Assembly and many young Chinese were drafted into the army.

In North Vietnam, where the Chinese economic role has been less important than in the South, an agreement was reached in 1955 between Peking and Hanoi in which the ethnic Chinese would "gradually become Vietnamese citizens," according to Hanoi's version.

Even after becoming Vietnamese citizens, the Chinese maintained a separate world with their own culture and language. "We are Vietnamese on paper, but we are always Chinese at heart," said Vietnam-born Hua Ton, 37, a former businessman from Cholon who now lives in Falls Church.

Chinese merchants accumulated more wealth as billions of U.S. dollars poured into South Vietnam during the war. They won a reputation for black marketeering, hoarding and bribery, and therefore were often targets of Vietnamese hostility.

Chinese millionaire Ta Vinh was shot by a firing squad in front of Saigon's central market in 1966 at an early stage of the anti-corruption campaign launched by then Prime Minister Nguyen Cao Ky. In September 1975, when the newly victorious Communist government in the South opened a drive against monopolists, 12 of 15 "ringleaders" reportedly arrested were Chinese.

Once Vietnam was unified, private enterprise came under official disapproval and many Chinese left the provincial cities and towns. Some moved to Chinese quarters of Saigon, now called Ho Chi Minh City, where life was relatively less rigidly controlled than in other parts of the country. Some went to so-called New Economic Zones in the countryside.

Half of the 8,000 Chinese residents of Danang left that port city, said Hua Cuong of Arlington, a Chinese-born former grocery owner, who fled from the city in May 1977. Vietnamese "boat people" say a disproportionate number of Chinese have fled the country.

As part of the "socialist transformation" of southern Vietnam, communist authorities last March closed all "bourgeois tradesmen's" shops, touching off the mass exodus of Chinese and sparking the anger of Peking.

How the refugees really feel about the Communist China cause is a question. The Chinese, aware that there has not much difference between the New Economic Zones in Vietnam and state farms in China, went back to their native country because "they would rather be oppressed by their compatriots than by the Vietnamese," according to some Chinese escapees from Vietnam.

Peking and Taipei have competed for the support of the ethnic Chinese in Vietnam, but Taiwan, with a big embassy in Saigon, appeared for a long time at least to have an upper hand. Although a small number of Chinese joined the Vietcong, fighting the Saigon government, influence of Peking was "very limited," said former Saigon police colonel Dan Van Minh.

Peking apparently has not improved its standing since the fall of South Vietnam in April 1975.

It does not have a consulate in southern Vietnam, where more than a million Chinese live. No Chinese diplomat from Peking's embassy in Hanoi has any public contact with the Chinese in Cholon, according to Tran Hung, a Vietnam-born Chinese, who arrived in Washington area seven weeks ago.

The apparent restriction on Chinese diplomats' activities in southern Vietnam could reflect Hanoi's mistrust of its big neighbor and former ally. The mistrust stems from the Chinese domination of Vietnam for a thousand years and repeated invasions of a small country in the following centuries.

During the Vietnam war Peking supported North Vietnam, but the mistrust did not wholly disappear. The claims by both China and Vietnam on the potentially oil-rich Spratly and Paracel islands and the competition for influence in Indochina have generated renewed hostility. The situation has been made even worse by Vietnam's close ties with the Soviet Union, whom China regards as its arch-enemy.