On a crowded Sunday morning inside the Forbidden City, one of China's best-known TV anchors is warily eyeing a squat, slope-roofed building that for five centuries housed the office of the emperor's physicians. Its thick red pillars are in need of paint. Its windows are grimy with soot from Beijing's notoriously bad air. Only the crowd at the door gives a hint of what's inside: a Starbucks.

The coffee chain, which opened this outpost seven years ago, has already caved in to the sensitivities of being located in this epicenter of Chinese culture. It has removed its familiar green sign from the entrance. But the counter can still easily be found by tracing the streams of customers toting Starbucks cups as they step through the passageways.

"This is wrong," says Rui Chenggang, drawing stares from passersby who know him as China's Lou Dobbs, the host of a nightly TV show called "BizChina." Rui is neither a narrow-minded nationalist, he quickly adds, nor anti-Starbucks. He's just pro-China and resolutely against what he sees as the mindless grasping at Western influences that followed China's opening to the world.

Rui's blog, which features a letter he sent to Starbucks CEO Jim Donald, has stirred a populist movement to oust the store from the Forbidden City. And it has put Starbucks at the center of a broader phenomenon taking hold in China. "Once we were too eager to show we were part of the world," says Rui. "But things are changing. We need to preserve our own cultural heritage."

Seven years ago China had just agreed to join the World Trade Organization and was eager to embrace globalization in its mad rush to modernize. Western stuff was hot. Chinese stuff was not. The trendiest hangouts, the places where China's hipsters and elites would gather, like Shanghai's M on the Bund, served Western food, relegating Chinese high cuisine to dowdy formal banquets. Fast-food outlets such as KFC began popping up everywhere. Luxury retailers piled in too: the first Tiffany's in 2001, Paul Smith and Moschino in 2002, Armani and Louis Vuitton flagship stores in 2004 and 2005.

Western companies and their products were viewed as offering superior quality, technology and prestige. Newly wealthy Chinese, wanting to show off their success with displays of affluence, did what was natural for nouveaux riches everywhere: They bought expensive Western products and showed them off.

Chinese Renaissance

But there's a not-so-subtle shift happening in China. After more than a decade of embracing all things Western, Chinese are turning to things Chinese. Today, mainland companies are no longer churning out only shoddy goods. They are producing products that in the eyes of consumers rival or are better than those in the West.

A survey by McKinsey of 800 teenagers found that 88 percent trust Chinese brands, compared with 65 percent who say the same of foreign ones. The reasons are many, including a spate of stories about safety issues involving foreign consumer products and food. But the improved quality of Chinese brands is also a factor. The brands aren't well-known outside China - yet. But they include Haier appliances, Aigo electronics and Geely and Chery cars.

These days China has world-class fashion designers whose modern takes on mandarin collars and silk designs of bygone dynasties are worn proudly to parties by chic Chinese and incorporated into streetwear by the middle class. Chinese modern art is fetching record prices. Traditional patterns and styles are making their way into modern furniture, architecture and design. The teachings of Confucius, the practice of traditional medicine, and worship at Buddhist temples are experiencing renewed popularity - and receiving tacit if not outright government support. Among Shanghainese women, the short hairstyles of an earlier era have become fashionable again, replacing a decade of Jennifer Aniston locks copied from Friends.

And the most hip restaurant in China is, finally, Chinese - the Lan Club in Beijing, owned by Zhang Lan, founder of the successful South Beauty restaurant chain, which features Sichuan dishes. "Chinese cuisine always had everything, nutrition- and taste-wise, but what was lacking was the packaging," says Zhang. "People in China didn't know how to present it. I have changed that."

A recent photo spread of her culinary palace in Vogue China , which also featured a Chinese Allure section on fashions with Chinese characteristics, was headlined SEE AND BE SEEN. Nobody except foreigners on expense accounts is seen at M on the Bund anymore.

So now it's Chineseness that's hot. "People are increasingly proud of their country and proud of the progress of the country," says brand consultant Martin Roll, author of Asian Brand Strategy. "As society moves on and becomes more sophisticated, there comes a taste for nationalism, for what is local. We're going to see Western brands have more and more competition in China."

China's $1.2 trillion cash hoard

Sinofication presents a challenge most Western companies have yet to come to terms with. While many have set up R&D centers in China, their experiments have mostly resulted in minor tweaks to products developed abroad. The major innovations being worked on in China have yet to hit the market. And so far there's little evidence that Western brands are suffering - after all, an economy rising at 11 percent lifts all boats.

But increasingly, Chinese companies are benefiting from nationalist feeling, gaining market share in sectors such as passenger cars and consumer electronics that were previously the exclusive province of foreign companies. The 2008 Olympics in Beijing will likely add more kindling to this nationalist spark.

The government is also making an effort to reduce dependence on foreigners for manufacturing and technology transfer. Preferential tax rates for foreign companies - now at 15 percent, compared with 33 percent for Chinese - are set to end this year. And last fall the Communist Party Congress endorsed a push for "Chinese innovation" by doubling the amount spent on R&D.

To help reduce China's dependence on foreign companies, Beijing has set a target of 60 percent for domestic car brands sold by 2010, largely by providing consumer financing and incentives. Today, Chinese-branded cars claim little more than 20 percent of a market dominated by Buicks, Volkswagens and Toyotas. But in March, Chery sold more cars in China than any other automaker.

Foreigners also are being kept from buying major stakes in industries deemed sensitive to government interests, including cement, soybeans and finance. While such moves are viewed as retaliation for the U.S. refusal to let China National Offshore Oil Corp. buy Unocal in 2005, they have been strengthened by economic nationalism and entrenched as policy.

Embracing the national culture

The origins of Chineseness lie in a belief in the validity of Chinese tradition, much of which was suppressed or forgotten after 1949. There is growing sentiment in China that 5,000 years of civilization has created superior ways of doing things that have only to be revived today. History shows are popular on TV. And groups dedicated to promoting Han culture have tens of thousands of adherents. With the ideological influence of communism waning, the search for tradition has resonance.

That's different from what happened in Japan. Even after 50 years of postwar development, Japanese remain Western-oriented and modernist in their tastes. Products designed by Sony ( Charts ), Panasonic and Toshiba look a lot like those designed by Philips, Siemens and Dell.

In China, by contrast, Huawei has a popular line of mobile phones incorporating the design of a Chinese sword that, it says, "calls back the time of warriors, when courage and strength prevailed." Aigo, a rapidly growing consumer electronics company whose name in Chinese means "person who loves his country," claims a leading market share with its MP3 players that display karaoke verses in Chinese.

Tracy Zhang, a 31-year-old advertising agency founder, wants to buy an Aigo camera when she replaces her Sony Cybershot this year. Aigo is not necessarily better than Sony, she says, but it's comparable. And most foreign products are made in China anyway, so what's the difference? Her gated home in suburban Beijing already has two refrigerators, a washing machine and a water heater, all made by Haier. No problems. Her TV is made by China's TCL. It works fine.

"In the past 'Made in China' meant poor quality, but now there's no problem at all," she says. "So why shouldn't I buy a Chinese brand instead?" What really makes a difference, she says, is after-sale service. And in that area, according to a 2005 survey by China Quality Promotion, a consumer group, domestic brands scored 11 percentage points higher than foreign rivals.

There are few such practical considerations when it comes to fashion, which is increasingly taking a page from the past and eschewing the Western designs that have dominated since people stopped wearing drab Mao suits. "I like to wear Chinese-style clothes, like the qipao, so I really like these designs," says Huang Ruimin, browsing through $3,000 hand-stitched mandarin-collar dresses at the elegant Shanghai boutique of Shiatzy Chen, a designer often called China's Chanel.

The qipao, a dress with a fitted, high-necked bodice and slit thigh, originated in Shanghai in the 1920s, when Chinese women, imitating the tunics of Qing dynasty mandarins, narrowed them to fit their forms, then cut slits to dance the jitterbug. Now it's back in fashion, sometimes in zebra prints or other new patterns. Huang, who with her husband owns a factory in Zhejiang province, is a repeat customer.

It's not unusual, Chen says, for a wealthy woman from the provinces to come to Shanghai for the day and buy every skirt in her size - spending tens of thousands of dollars in a single spree. Such profligacy propelled Chen to open a store in the northeastern city of Qingdao last year and make plans to open six more this year, bringing her total in China to 12, plus a dozen in Taiwan and one on Paris's Rue St. Honoré.

"More Chinese have an interest in wearing Chinese-design clothes," says Chen, a Taiwanese who entered the mainland market in 2003. She recently opened a flagship store at No. 9 on the Bund, a piece of prime real estate whose landlords told her they were pleased to offer such prominence for "a brand that would make China proud" - unlike Armani and other foreign shops nearby.

"It used to be that only international designers did a good job on quality," Chen explains. "At first the newly rich will be interested in famous designer brands, but after some time they start to purchase their own culture." Chen finds inspiration in the Song dynasty: "My desire is to take these beautiful things from history and blend them with the modern in a way that's suitable for the present."

Capitalizing on this is Ordifen International, a Shanghai lingerie company started by Wang Wen Tsung, who also comes from Taiwan. "If women are wearing a qipao, they feel they need to have the harmony of wearing Chinese-style undergarments too," Wang says. "When they wear it, there's a feeling of going back where you belong."

After researching the dudou, a silk triangle that women tied like a bib under their clothes in ancient times, Wang launched a limited-edition Chinese Red lingerie series in 2004. Ordifen increases public awareness of China's history by sponsoring an annual design contest in which the models receive wide national coverage and the winning design is put into production. "The Chinese left Chinese characteristics behind for so long," Wang says. "They're learning now how to accept them back."

A new aesthetic

There's a desire to find a new Chinese aesthetic and sense of design that neither Western nor Chinese companies have discovered yet, says Zhou Yi, founder of the Shanghai firm S-point Design, which has done design-adaptation work for Nike, Siemens, and Chivas.

"The younger generation is putting a Chinese flag on their T-shirts," says Zhou. "It doesn't mean they want to return to Mao times, but they want to find themselves. Yao Ming and the Olympics make them proud to be Chinese." And they want products to reflect those tastes. It's naive to think it can be done with just dragons and China's national colors, Zhou says. In fact, while Western manufacturers offer mobile phones, laptops and small electronic products in red or gold in the hope of catching a buzz with consumers, the bestselling colors in China, as elsewhere in the world, are black and silver.

Savvy companies are changing the way products are utilized, replacing keyboards, for example, with screens that use a stylus for Chinese handwriting. Motorola's $400 Motoming sold two million in six months. The company is advertising the Crazr in China "with a much more local approach" than a year ago, says Ian Chapman-Banks, head of Motorola marketing in Beijing. He's using a well-known actress in glamorous poses wearing Tang dynasty, Ming dynasty and 1920s Shanghai costumes and hairstyles.

Sony, which noticed that Chinese homes have more wall space than Japanese, designed a thinner flat-screen TV to hang "like a scroll," says Katsumi Yamatogi, head of Sony's R&D center in Shanghai.

There's no clearer example of adapting to Chineseness than Yum Brands, the owner of KFC, Taco Bell and Pizza Hut. Sam Su, president of Yum's China division, came up with the idea of fast-food Chinese restaurants and now has seven in Shanghai. "The sense we want to give people is that finally we have our own fast food," Su says. The name, East Dawning, comes from a Song dynasty poem that most Chinese recognize, and the décor incorporates Chinese design elements such as a round moon window. Dishes include pork, rice and tea-boiled egg ($2.25).

Su says the rollout has been slow because Chinese food is difficult to standardize, with its steaming, frying, baking, braising, boiling and various sauces. But once the process is down pat, he expects a nationwide - and possibly global - expansion. "Ultimately it should be an even bigger brand than KFC," says Su. "We have the biggest market in the world."

Su insists that Yum has no plans to slow the growth of KFC outlets in China, seeing a potential market for 15,000, compared with more than 1,800 now. In the 1990s, he says, "there was a tremendous interest in everything foreign. Chinese welcomed all these brands with open arms. That's not to say that people reject that now. They just want other things, other choices."

The challenge for Western companies, then, is to figure out how to stay in this game, offering products that appeal to China's growing sense of Chineseness - to its nationalist pride and strength of tradition. Brand consultant Roll agrees that the future for Western brands in China won't mean a rejection of things Western, but companies will have to be quicker to keep up with the accelerating pace of Chinese innovation. "It's getting more sophisticated," he says, "and people will be mixing and matching." And waiting for companies - both Western and Chinese - to catch up.