I have been grading many essay questions on the topic of whether human nature is good or bad according to Chinese philosophy, and I thought that I would weigh in on the question since I've been forced to think through it fifty times.
On the side of Mengzi (Mencius): there are roots in human nature which give us the capacity of being good. Further, when left to themselves, they make us actually good. For example, according to Mengzi, if we see a child stuck in a well, we will save the child. This is the case even if the child is not ours and we expect no reward from saving the child.
Roots like this sense of compassion are how we could ever get any virtuous qualities. Because we naturally feel compassion,* we can actually be benevolent. The alternative would be that we would have a set of rules instructing us to act in a benevolent way, but without anything being internalized beyond these rules.**
We cease being good by failing to reflect on these roots in our nature. We naturally feel compassion for those close to us. As we reflect and nourish the feeling, it grows outward, encompassing more and more people. External forces can push us away, however. For an illustration, a starving person will eat whatever is offered to her, though her nature distinguishes between tasty and disgusting food when left to itself. Similarly, conditions such as oppression and poverty can distort our natural judgments.
For Xunzi, on the other hand, human nature is bad. We are born and our nature is only concerned with ourselves. A baby feels its own hunger, not that of another. Each of us starts by seeking our own immediate advantage and this alone. We need to be shown a way out. This requires a virtuous role model (the sage) with her standards and practices for reaching the good life.
This good life is peace and harmony in society for Chinese thought. As long as we seek our own immediate benefit, we cause disorder and disharmony. This is why human nature is bad, not because of some arbitrary command from on high decreeing it to be such. We can recognize the need to be better, since such a disharmonious society is bad for everyone involved at some level, but without the external force of the sage we cannot escape. The Achaeans in the Iliad honoured warriors and those who could accumulate wealth, even while realizing that a life of war is horrible for human beings. We need (a) a model to see to give us possibilities, (b) a set of practices to follow to discipline us against seeking our immediate benefit, and (c) our own deliberate effort to become good.
The problem is, who is right? Contemporary science backs Mengzi to an extent (see http://opinionator.blogs.nytimes.com/2010/10/17/morals-without-god/ for a quick view of some of the issues). If there were a race of sentient cuttlefish, they would have an entirely different nature and set of ethics.*** However, human beings are mammals and so have social natures. Living together is something hard-wired into the vast majority of us. We naturally feel empathy, fairness, altruism, etc., and not just our own immediate, purely self-focused benefit.
Still, this only helps part of Mengzi's argument. We do not seem to naturally keep extending these roots out further and further, since whatever is according to nature (or the way of heaven, or however one wishes to put it) happens always or for the most part. We stop at a given point where we feel comfortable, with whatever tribe is relevant in our context. Genocides and general dickishness seem to be a natural trait of human beings as much as anything else. Is there some other basic component of human nature we need in order to account for this?**** Are there always external forces resisting our natural impulses, always shortages of resources that cause societies to go wrong at some point? Does our intrinsically social nature work against us as much as for us, depending on the society into which we are born?
Addendum: perhaps the entire problem is that we are starting off with the evaluative terms "good" and "bad". If we were to stick with simple descriptions, some of the problems disappear. Human nature is intrinsically social, and geared toward benefiting those around us. This is simultaneously good and bad, depending on what we are looking at any given time. Starting with the issue of good/bad is therefore trying to cut against the joints of reality, which of course will lead to contradictory conclusions.
* Note that "feeling" is not opposed to "thinking" in Chinese thought. There is simply the xin, the heart/mind/all inner states together, and feeling correctly is an important part of thinking correctly.
** Which rules out a divine command ethic. Even if God commands it, this does not mean that it is anything that would be good according to our natures.
*** Which is why I find the concept of cephalopod intelligence so fascinating. They are already intelligent creatures, but from an entirely different region of the evolutionary chain and without our social instincts. I really want to write something about a cephalopod (anti-?)civilization at some point.
**** Of course, someone is responding at this point with the theological answer of "sin." But it seems that this is a cheap answer, when there are genuinely explanatory and natural accounts available. Evolutionarily speaking, communities which preserve each other against competitors survive. Aggression helps creatures survive. Even atrocious acts such as rape are found within the natural order (go research ducks - nasty things), and there seems to be no reason to explain them as a result of some fall rather than a brutal way for nature to accomplish its purposes of perpetuation. "Sin" only makes sense if you expect that everything should be perfect in the first place and then find that it isn't. But I have yet to see one iota of evidence for such an expectation unless one has already assumed a set of theological claims, or is expecting a different sort of perfection than one which would mean anything for the daily lives of human beings.