A Chinese official complimented an American correspondent on an article he has just written. The correspondent thanked him and asked where he had seen it. The Chinese acted as if he had not heard.

At a hotel billing office, a foreign business peered with interest at a small Chinese newspaper left on a counter. A clerk quickly snatched it away. A diplomat out for a stroll found a discarded piece of newsprint under a park bench, soaked by a recent shower. He looked both ways, then rolled it up and took it home to dry out in front of the radiator.

It is a time for keeping secrets in China. Party officials are being cautioned about talking to their children, and an overbearing, 29-year-old official secrets act has been published on the front page of the People's Daily.

The awkwardness and comic opera mystery reach a crescendo in the form of a little four-page tabloid newspaper, blandly named Reference News, but in fact the largest circulation underground daily in the world.

It is the centerpiece of the Chinese government's invisible network of internal books, internal magazines, internal movies and internal briefings, now suffering from Peking's gradual transformation into a cosmopolitan, and thus leaky, world capital. Behind this intricate set of screens, the Chinese, at least some of them, find out what is going on. Knowledge is power, and they would prefer to keep it in the family.

With at least 9 million daily subscribers, Reference News is China's biggest newspaper. It is surpassed in the world only by Pravda and the Soviet Youth Communist League paper. Both other Chinese publications do not quote from it. It is not found on Peking newsstands. To give, much less sell, a copy to a foreigner here is, if not a crime, at least a gross indiscretion that can land one in very hot water.

Under its masthead is clearly written: "Internal distribution. Hold onto carefully."

Yet inside is nothing more than an assortment of articles from foreign newspapers and magazines, translated into Chinese.

Even the foreign correspondents who write the articles are officially barred from seeing the one Chinese newspaper that reprints their stories.

"They figure if we know what they are printing and what they are not choosing to print, we could guess at the thrust of their policy," said one longtime resident who has tried, usually in vain, to get copies of the newspaper.

A review of several dozen copies obtained by The Washington Post from Chinese sources here over the last two years reveals that editors of Reference News plays a game of echoes. They publish reports by American or other foreign journalists, or procommunist Hong Kong papers, that explain what is happening in China with a clarity that would be too much for the official Chinese press.

This way, the message still gets to the Chinese, with no one having to take immediate responsibility for it. Some people suspect that some news is leaked abroad just so it can be printed in Reference News.

The People's Daily underlined this contradiction in April by reprinting, and endorsing in a special edition, a still official secrets act drawn up as a "temporary" measure in 1951. It lists as classified everything from military information to "secret items" of economic, cultural, education and public health work and even weather forecasts.

Reference News, available to most city workers but not usually to peasants, provides a wealth of detail and an analytical framework not found in the Chinese press. It exposes the Chinese to such controversial topics as a Los Angeles Times editorial questioning the need to sell U.S. arms to Lama asking more freedom for Tibetans.

Its editors still occasionally pare away topics that seem too sensitive, such as doubts expressed in a recent American wire service story that Premier Hua Guofeng would be able to make a promised trip to the United States.

The March 5 Reference News reprinted, four days later, a Washington Post article about a purge of adversaries of Vice Premier Deng Xiaoping from the Politburo. It left in a paragraph that said many party members were afraid Deng might be purged or die before his policies bore fruit, a statement too blunt for the official Chinese press. But the paper removed a paragraph that said the purge would tarnish the memory of the late chairman Mao Tse-tung and further isolate his successor, Hua.

One typical issue March 31 included a Jack Anderson column on development of a Chinese ICBM, a U.S. News and World Report piece comparing life in China and the Soviet Union, a Japanese piece about an operation on one of the Tokyo zoo's pandas, a Manchester Guardian article on Soviet efforts to isolate Yugoslavia and what appears to be an article from Mother Jones on U.S. overseas sales of products banned for domestic use.

Reference News is supplemented by weekly or monthly oral briefings that seek to give some urban Chinese a further version of reality, not to be repeated to outsiders. These take the form of tape recordings of secret speeches by high party leaders, carefully background statements and reminders at weekly political meetings passed down from one administrative level to the next.

There is also, organized as if the government were a dissident group fearful of discovery, a vast network of internal books and publications that can be purchased only as special stores. The April 7 Reference News advertises a general directory of foreign nations, with statistical data and international organizations, obtainable from the internal books section of the New China News Agency's bookstore with a letter of introduction from a county-level unit.

Higher officials, beginning with grade 13 cadres or bureau directors, may read a much more detailed collection of foreign news called Reference Materials. Chinese officials say this is rather long and boring, and only read when articles pertain directly to the official's responsibilities. A collection of unpublished letters to the People's Daily also circulates at higher levels to give officials a sense of what people are complaining about.

Occasionally, a few foreigners are allowed to attend some briefings. One American working as an editor at the New China News Agency was escorted to a special playing of a tape of an unpublicized speech by Vice Premier Deng in January. His interpreter kept saying, "Remember, this is jargon. It's jargon."