Google Inc moved its China Internet search service to Hong Kong in a bid to resolve its dispute with Beijing over censored search results while keeping a foot in the world's largest Internet market.
But comments on Xinhua, the official Chinese news agency, suggested that Google's attempt to strike a balance may not go over well with Beijing. Xinhua quoted a government official as saying Google has violated its written promise and is totally wrong by stopping censorship of its Chinese language search results.
Google said on Monday it intends to continue research and development work in China, as well as maintain a sales staff, even as it effectively stopped serving search results from its mainland Chinese site Google.cn and redirected traffic to an unfiltered search site in Hong Kong.
For the average mainland Chinese Web surfer, the change is unlikely to make much difference unless they can get around government-imposed firewalls that block searches for sensitive topics like the Dalai Lama.
The decision comes amid heightened tensions between China and the United States over a range issues from Internet freedom to the yuan exchange rate, from economic sanctions on Iran to U.S. weapons sales to Taiwan.
This is not the end of the saga, this is just the end of the chapter, said Colin Gillis, analyst at BGC Financial. You sort of make China look like the bad guy and you think you're going to be selling Google phones? Good luck, we'll see how that goes.
Google, the world's No. 1 Internet search engine, acknowledged that it failed to make headway in negotiations with the Chinese government for permission to operate an uncensored search site in the country.
The Chinese government has been crystal clear throughout our discussions that self-censorship is a non-negotiable legal requirement, Google said in a post on its official Web blog on Monday.
The White House also said it was disappointed an agreement could not be reached between Google and China to allow the company to keep running Chinese search services.
In an address in January, U.S. Secretary of State Hillary Clinton called for worldwide Internet freedoms and singled out China among a few other countries. Several U.S. senators formed a caucus to promote online freedom.
Google had flagged its intention to withdraw from China, the world's largest Internet market by users, in January when it said it had detected a sophisticated cyber attack on its computers that it traced to China
Google generates a small portion of its nearly $24 billion in annual revenue in China, where the company lags home-grown search powerhouse Baidu Inc in market share. But China represents an important growth opportunity for Google, which has seen its growth slow in mature markets like the United States and Western Europe.
Shares of Google, which have fallen more than 6 percent since Google announced plans to stop censoring search in China in January, closed Monday's trading session down $2.50 at $557.60. Shares of Baidu, which have soared more than 40 percent during the same timeframe, finished up $10.07 at $579.72.
Google said its decision to re-route traffic to an uncensored Hong Kong site in simplified Chinese that is specifically designed for users in mainland China is entirely legal.
A former British colony, Hong Kong is a special administrative region of China and enjoys more freedom, including an uncensored Internet, than mainland China.
But the company acknowledged that the Chinese government could at any time block access to the services, which include Google search, news and images.
Reuters reporters in Beijing were automatically taken to google.com.hk from google.cn, and when they tried to search that site for sensitive words such as dissident Liu Xiaobo or Dalai Lama, the search results are blocked.
(Reporting by Alexei Oreskovic; Additional reporting by Melanie Lee, Chris Buckley, Paul Eckert and Edwin Chan; Editing by Tiffany Wu and Richard Chang)