U.S. tech firms are stuck between a rock and a hard place. Xi Jinping knows that.
There’s a chance that China’s President Xi Jinping wears a baseball hat and attends a Starbucks when he visits the U.S. this week. This would count as exciting.
The actual diplomacy involved in Xi’s second visit to the U.S., his first official state visit complete with White House black-tie dinner and 21-gun salute, is less dramatic. The U.S. and China diplomatic teams remain far apart on a host of issues including Chinese hacking that targets U.S. companies, China’s buildup of islands in the South China Sea for military purpose, and the pressure American companies say they’ve faced in China over the past couple years. Because of this, expectations are low that anything of consequence comes out of Xi’s visit.
Nowhere is that more evident than for U.S. tech companies operating in China. They are caught in the middle of the two entrenched sides—Washington officials who are reportedly still considering economic sanctions in retaliation to Chinese hacking on one side, and unapologetic Chinese officials on the other—and China appears to be using this to its advantage. Earlier this month China’s head of Internet policy Lu Wei arranged a meeting in Seattle this week with top U.S. companies that could include CEOs from Apple (AAPL), Facebook (FB), Google (GOOG), and IBM (IBM). The fact that some of those companies’ services are blocked in China and others like Apple are reliant on the country for a large percentage of their business, affords China leverage.
“The Seattle Internet conference to which the Chinese have invited the Who’s Who of U.S. IT magnates appears intended, at least in part, to warn American tech businesses off supporting any action that the Obama administration has planned to retaliate for China’s hacking and industrial espionage,” William McCahill, a veteran China watcher who left a U.S. diplomatic career in 2000 to focus on business in the country, wrote last week for Mirabaud Securities.
These are the same U.S. companies who have complained of limited access in the Chinese market and proposed new government regulations that would require them to store data inside the country. But China can put pressure on U.S. tech because the companies have increasing money and, in some desperate cases, reputation on the line in China. Dell, for instance, last week pledged to spend an astounding $125 billion in China over the next five years in an apparent attempt to revitalize its struggling business. Cisco (CSCO) pledged $10 billion in capital spending over several years earlier this year in what some watchers described as a desperate play for relevancy in China after Cisco’s sales have plummeted following Edward Snowden’s disclosures two years ago that Cisco’s customers’ products were used by the NSA.
McCahill believes the lure of China’s market is too great for U.S. tech companies to protest Internet head Lu Wei’s demands. “But whatever their China business models, the IT executives will likely succumb, even if with pinched nostrils, to Lu Wei’s and Xi’s siren song.”
The Seattle meeting is the latest in what appear to be a sting of coordinated moves aimed at U.S. technology companies in China. This summer one of China’s Internet regulators sent a letter to American tech firms asking them to agree to store user data inside the country and agree to language that’s known for building backdoor access to data, the New York Times reported last week. There are two views on this. One holds that China is trying to build up its own cloud industry by creating the requirements. The second holds that data stored within the country is more accessible to the government. (Officials from the FBI and CIA, for their part, have also pushed for access to decrypted data under court order over the past year and faced resistance from the tech industry, according to the Washington Post.)
“I think there’s a lot of mixed messages being sent,” says Adam Segal, senior fellow for China Studies at the Council on Foreign Relations in New York. “They want to remind U.S. companies how important the China market is to them and that they expect U.S. companies, if they want to do well, have to follow Chinese rules.”
What’s different about Xi’s visit compared to those of his predecessors Hu Jintao and Jiang Zemin is that China now has its own tech heavyweights. Also in Seattle, former Treasury Secretary Hank Paulson’s think tank organized a Wednesday meeting between 30 CEO that include those from China’s Big Three Tech names—Baidu, Alibaba (BABA), and Tencent—as well as Jeff Bezos of Amazon (AMZN), Tim Cook at Apple, and John Chambers of Cisco. One reason behind China’s increasingly onerous restrictions on U.S. tech may be that it has a growing list of its own competitors. Huawei is the country’s Cisco. Xiaomi has held higher market share than Apple in the country. Tencent’s WeChat app is a Facebook analogue. Xi says in a book of his speeches, The Governance of China, that China’s export-driven economy “though large in size, is not strong” and concludes that scientific and technology innovation is the future. China can leverage U.S. tech against Washington’s more aggressive stance today because while U.S. tech companies need the Chinese market, China may need them less.
What’s clear is that the timing of China’s Internet heads meeting is no coincidence. The meeting was pushed up to coincide with Xi’s visit and some say distract from the bigger issues raised on the U.S. side. “This is about putting as much lipstick as possible on the pig in advance of Xi going into Washington where the administration is saying cyber attacks are the problem and the operating environment for U.S. firms is narrowing,” an official told the New York Times last week.
The Chinese state press, meanwhile, has framed Xi’s visit as one between countries cooperating ever more. “Chinese President Xi Jinping is ready to seek genuine friendship and cooperation across the Pacific,” Xinhua wrote last week. China’s foreign minister said Wednesday Xi would focus on building trust on his trip and try to resolve disputes between the countries in Asia-Pacific. Meanwhile, the Party-controlled People’s Daily covered all Xi’s trips to the U.S. and ended with a photo of Obama and Xi in Sunnylands, Calif., in 2013 that ‘became the silhouette of a new era of Sino-US relations.”
That friendly new era is mostly just wishful thinking. The only clear new era seems to be that U.S. technology companies in particular need to succeed in China, the world’s largest Internet market with 600 million users, and China is using that to its advantage.
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