Arms merchants representing some of the world's leading defense companies have descended on Peking for the first large-scale international defense exhibition to be held here.

U.S. companies have the heaviest representation of foreign firms displaying weapons at the exhibition, which opens Tuesday and runs until Feb. 2.

But they face sharp competition in some areas from French and West German firms.

More than 160 companies from 17 countries and regions are participating.

Products on display include aviation equipment, missiles and defense electronics.

The debate over how far the Chinese will go in purchasing western defense equipment goes back more than a decade. The Chinese are noted for doing much window shopping but little buying. But because of a few sales and the knowledge that the Chinese armed forces need new equipment, the merchants keep coming.

The most recent significant development in this controversial and sometimes lucrative field is a Reagan administration decision to seek congressional approval for the sale of radar and navigational equipment to help modernize the Chinese Air Force's F8 jet fighter plane. The sale could come to as much as $500 million, according to reports from Washington.

This would be the second government-to-government arms sale between the two countries since they established diplomatic relations in 1979. The first agreement was made last year for $98 million worth of technology and equipment to help modernize China's production of artillery shells.

The largest contingent of U.S. exhibitors consists of 18 aerospace and defense companies participating in a joint exhibit organized by American Aerospace Industries, Inc., a marketing firm based in Harrison, N.Y.

Hans G. Hollander, president of American Aerospace Industries, said that the U.S. government has pursued an ambiguous and sometimes erratic policy on arms sales to China, that has resulted in significant advantages to French and British firms.

"The policy ought to be more definitive and not this Mickey-Mousing around, one day saying yes and one day no," Hollander said.

According to Hollander, it will "take quite some time" for the Chinese to develop their own military technologies to the point at which they can do without imported foreign technologies.

An American businessman with long experience here who represents a U.S. defense company said that a major factor is the amount of foreign exchange the Chinese can earn by selling their defense products overseas.

In 1984, this businessman said, China was reported to have made a major push into the international arms market, selling overseas more than $1 billion worth of weapons, including small arms, rocket-launchers and antitank guns.

If the Chinese can continue to increase such sales, the businessman said, they will be in a much better position to buy sophisticated equipment from abroad of the type that they cannot yet produce themselves.