If they overtly offend China this would negatively impact YC current portfolio companies, discourage current/future LP, and other make their business more difficult. So they went with an intermediate approach.
I agree with you. It's a tragedy of the commons, no one want to be "the one" who offends China if all their competitors do not. It's the same thing that drove the mad rush for Chinese market share.
However, despite realizing this problem, it is not clear what to do about it. Clearly, YC did not choose to become leaders on the issue.
Don't you see that this mentality is exactly the problem? Some of these comments are really surprising.