By David Ljunggren
OTTAWA (Reuters) - China's decision to investigate two Canadians for suspected spying highlights a sharp and unexpected deterioration in bilateral ties just months ahead of a trip by Canada's Prime Minister Stephen Harper to Beijing.
The detention of the couple, long-time residents in China who ran a coffee shop on the border with North Korea, could also make life tougher for the small group of Canadian government ministers who favor closer economic links with Beijing.
Chinese authorities are investigating the couple - Kevin Garratt and his wife Julia Dawn Garratt - for suspected theft of military and intelligence information and for threatening national security.
The detention came less than a week after Canada accused Chinese hackers of breaking into a key computer network, the first time it has ever singled out China for such a security breach. Beijing dismissed the allegations as "irresponsible."
The two incidents look set to overshadow a visit by Harper to Beijing in November for a regional summit which could include a first meeting with China's President Xi Jinping.
Since taking power in early 2006, Canada's right-leaning Conservatives have adopted an inconsistent policy on China, reflecting splits between pro-business members and social conservatives who are suspicious of Beijing.
"There is a deep division within caucus and within cabinet on how to respond ... there is a clear battle," said Paul Evans, a professor at the University of British Columbia and one of Canada's leading experts on China.
Evans said attempts by the cabinet to agree on a China strategy had failed in recent years.
An official in Harper's office declined to comment, saying merely that "we have a frank and mature dialogue on a variety of levels with the Chinese".
Social conservatives are influential in the Western oil-rich province of Alberta, which attracts around 80 percent of total Chinese energy investment.
The unofficial leader is Employment Minister Jason Kenney, who party officials say is very cautious about getting too close to China.
Government sources say Kenney is opposed inside cabinet by members such as Foreign Minister John Baird and Trade Minister Ed Fast, who favor more investment by China to boost a flagging Canadian economy.
"Some ministers are for, some are against, while the majority are wary," one veteran Conservative told Reuters.
"Certainly no one is going to stand up right now and talk about the need for closer ties with China."
CHILLY IMPACT
Harper last visited China in February 2012 and vowed to do all he could to boost exports of Canadian crude while calling for more Chinese investment in Canada.
Yet when the Chinese did make a move a few months later - state-owned CNOOC Ltd bid for energy firm Nexen, based in Alberta - it appeared to catch Canada off-guard.
Amid rare scenes of open discord among Conservatives over the wisdom of the deal, Harper approved it in December 2012 but slapped restrictions on how much of the Canadian energy sector that Chinese state-owned enterprises could buy.
Spokespeople for Harper and Foreign Minister John Baird declined to comment on any aspect of the case against the Canadian couple.
The Garratts' eldest son, Simeon, told Reuters that Canadian embassy officials are in contact with his brother, Peter, in Dandong.
Canadian officials say plans are being made for Harper to tour major cities in China in November.
"This (spying) incident is undoubtedly going to have a chilling effect on Mr Harper's meetings with the Chinese authorities," said Brock University professor Charles Burton, a former Canadian diplomat who served two tours in China.
The decision to allow the Nexen deal to go ahead was a clear defeat for Kenney, who is one of the favorites to eventually replace Harper.
"It's now getting caught up in electoral politics, potential succession politics in the Conservative Party," said Evans. The next federal election is due in October 2015.
Harper kept his distance from China for years, citing its human rights record, but under pressure from business started to make an effort to improve ties.
Government officials say China is an obvious source for some of the C$650 billion ($590 billion) investment in the natural resources patch that Ottawa says will be needed over the next decade or so.
And yet the split inside Harper's Conservatives is also reflected among Canadians in general.
A poll for the Vancouver-based Asia Pacific Foundation of Canada in June showed Canadian support for engagement with Asia is declining. Only 41 percent saw China's growing economic power as more of an opportunity than a threat for Canada, down from 48 percent in 2013. ($1=$1.10 Canadian)
(Reporting by David Ljunggren; Editing by Amran Abocar and Martin Howell)