Broken China by Tom Ziegler @FortuneMagazine March 22, 2010, 10:09 PM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons The burgeoning superpower keeps sabotaging its relationships with the outside world. By Paul Smalera, writer Google has long been embarrassed by having to restrict its search results in China and promised to stop the practice as soon as it could. The company agreed to self-censor in 2006 as a devil’s bargain to gain access to the Chinese market. But after last year’s successful and major hacking of its Chinese operations (possibly at the direction of Chinese leaders) CEO Eric Schmidt seems to have had enough. “Something will happen soon,” he said about the company’s China presence , just last week. Today, Google showed its hand. In a blog post, the company’s chief legal officer explained that Google China now redirects to Google.com.hk — Hong Kong. The search results are “specifically designed for users in mainland China.” Although China has blocked Hong Kong websites from the mainland in the past, most Beijing laws, including those regarding Internet censorship, do not apply in Hong Kong or China’s other “Special Administrative Region,” Macao. China may soon block Google’s Hong Kong redirect from the mainland, but the whole episode is a remarkable example of how China’s protectionist tendencies have yet again forced a tense and tricky situation, this time with one of the world’s most powerful companies. A few years ago, China was winning some begrudging international praise for finding ways to integrate capitalism into its Communist political structure. But it’s now clear that it never intended for that advance to turn into a two-way street. China’s money gambit Another great example is China’s manipulation of its currency. The country’s leaders have long stonewalled calls to let the renminbi float and are content to let us chuckle about buying cheap Chinese goods — because it’s laughing all the way to the bank. If the renminbi were allowed to float to its true value, Chinese exports would become much more expensive, and the world would buy fewer of them. The float would give Chinese citizens more purchasing power at home but would decrease the revenue the Chinese government earns in foreign currency. When President Obama called out China for its monetary gambit, Premier Wen Jiabao hammered right back. “We oppose the practice of finger-pointing among countries or strong-arm measures to force other countries to appreciate currencies,” he said. China’s tactical response has been to tinker with its purchase of U.S. Treasury bills, becoming a net seller of them last month, yet still holding more of them than anyone else in the world. In other words, it responded in its usual passive-aggressive way. Housing bubble redux This week, Time reports on Yang Jinyu, a Shanghai cab driver who turned a small nest egg into a mini-property empire, and is now planning to roost in a riverfront mansion in the suburbs. Sounds great for Yang and it sounds pretty familiar too: Housing bubble, anyone? If China allowed its currency to float, it could help stave off this real estate bubble. Cheap Chinese currency is behaving the way cheap credit did in the run up to our crisis — encouraging rampant speculation and high home values far out of whack with the average income, even among urban professionals. But China won’t use the strongest weapon it has against the bubble — a floating renminbi — because that would be a capitulation to U.S. interests. Shanghai cab drivers rejoice, for now After a 20th century of rule by persecution, starvation, and central committee planning, China’s government has found it nearly impossible to shut out the noisy democracies and free markets that exist outside its borders in the 21st. Yet it says that Google would be considered “unfriendly” if it turned off self-censorship. And China’s U.N. Ambassador says western nations shouldn’t look to China as a “scapegoat” to blame their economic problems on. China often adopts a hurt tone when it’s rejecting entreaties from foreign countries to behave fairly. It helps them dodge honest discussions, but it’s not fixing any problems. American investors already lining up to short China’s economy the way they shorted our own, forcing our government to prop up financial institutions and payout billions, collateral economic damage be damned. If our regulators couldn’t stop the carnage here, how will China stop the shorts there? Meanwhile the U.S. — still not exactly back in the world’s good graces — is finding broad support for its sparring over currency manipulation, since that issue affects every developed economy in the exact same way. China might note that Google has a pledge to do no evil, which it had long bent, as a business practice, to accommodate censorship there. But Google has never expressed any particular interest in being “friends,” either. Since the deeply scarring tragedies of 1989, China has spent decades rebuilding itself into a formidable power. Now that companies and countries are begging it to enter the global spotlight, it’s relishing the attention, yet confusingly sulking in the shadows, offstage.