YC China may not, but Innovation Works (http://en.innovation-works.com/) does. It's a slightly different model than YC (more of an incubator), but it's as close as you'll come.

Its claim to fame is that it was founded by KaiFu Lee, founder of MSRA and Google China. He's pretty much the Bill Gates of China.

On the first day of applications, they had something crazy like 30,000 resumes for 30 slots. So I'd say it's slightly competitive :)

The downside you mention becomes a central issue these days. The recent launched cntv.cn is a good example when the national TV in China attempt to take a big share from Internet VOD business (hulu model). To launch the site, they first use their popularity to fire bullets on other video sites for reasons such as adult content, copyright content or unauthorized content (every imported video has to be censored or it is illegal in China, the rule actually causes recent trouble in WTO). Under this pressure, many sites are closed.

The argument is, like what China did to its steel/telecom/coal business (FYI, are controlled by the nation itself). It tries to gain control on Internet, not only in management standpoint but actual business (nationalization). A more interesting view is that as most children of China's high level officials are in their 20s. They are likely to do Internet related business. Well, powerful parents bring benefits. It is not bad or unfair and it is understandable worldwide. But using your parents' money and relations to build business is millions light years far from what they do today in China. For example, Li Hehe, the son of Li Zhaoxing (former foreign minister of China) established a SNS website called 99sushe (http://99sushe.com). He actually uses his father's relation to have everyone who attend national English test (known as CET-4, required for college graduation) to register on his site in order to review their scores (http://cet.99sushe.com/). I see it as a classic abuse of their power. Far worse, to my knowledge, it is only a beginning.

YC is a institution which only provides a little money, good atmosphere, relations and access to first tier VC and law firms. Good lawyer, enough money and a brilliant you, that is the only things you need for doing "free" business in open countries (EU or U.S.). But in China, you need to build relations with high level officials. For a UGC site, you have to hire a person to delete contents immediately when the Internet cops phone you. It is just not economical for startup. But unfortunately these are crucial for your business success in China, and these are something YC China (in my imagination) cannot provide.

Nothing about China, other than price, works well with YC.

For one thing, there is an endless supply of obnoxious and moderately expensive government obstacles (I just paid the Beijing tax bureau ~5000 RMB for a receipt-printing machine).

For another thing, entrepreneurship is not well-respected in China like it is in the States. The general attitude is that if you have money, you almost certainly did something illegal to get it.

The big cities in China are not San Francisco. I think YC would be hard-pressed to find the sizable bubble of free-wheeling, free-thinking potential entrepreneurs to which it is accustomed.

I think India is better option because Indian government don't control internet as US. Its growing economy and market, the huge talents and having lots of R&D centers.