China's Mixed Signals

It would be understandable if foreign business leaders are confused by the signals Beijing is sending these days. On the one hand, Premier Wen Jiabao cordially greeted international executives last week, telling them, "It's important to reinforce your confidence in China." On the other, Wen's comments came the same day Google shut its China search engine, saying it would no longer bow to government pressure to censor results. That controversy has contributed to the growing uneasiness of business leaders operating in China. A new survey shows a startling uptick in the percentage of U.S. IT executives who feel "increasingly unwelcome to compete in the Chinese market," from 26 percent in December to 38 percent in early 2010. 

If it seems like China's sending mixed messages, that's because it is. While Beijing may appear monolithic to outsiders, in reality two camps are locked in a behind-the-scenes tussle over how best to deal with the world. On one side are the hardliners, who occupy prominent posts in the military and at Communist Party schools. Many of them "feel the U.S. is conniving to deceive China and keep it poor," says one Chinese foreign-affairs expert who requested anonymity. On the other side stand internationally oriented bureaucrats, including many in the Foreign Ministry and banking sector, who want to maintain peaceful ties with the West.

In recent months, the hardliners have dominated. Many observers view the trial of Rio Tinto executive Stern Hu, which also kicked off last week, as a high-profile way for Beijing to keep his employer in line. And the hacker attack in December that prompted Google's departure allegedly originated at two Chinese schools with close ties to the military. The hardliners' influence could also be seen in the official response to Google's decision last week, when the People's Daily excoriated the company for its "collusion" with U.S. intelligence.

But the internationalists haven't given up. Even as the People's Daily made its denunciation, officials at the Foreign Ministry were pledging that Google's exit wouldn't affect Sino-U.S. ties. Meanwhile, analysts see hints of a thaw in the hot-button issue of China's currency. Washington maintains that the yuan is artificially undervalued and hurts U.S. exports; China has always insisted that such claims are "irrational." But in early March, China's central-bank governor, Zhou Xiaochuan, said the yuan's dollar peg was a "special" response to the international financial crisis--suggesting it may be allowed to strengthen soon. That may sound like a victory for China's cosmopolitan cadres--but it could also fuel nationalists' anger as the intraparty wrangling continues.

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