Google Inc closed its China-based search service and began redirecting Web searchers to an uncensored portal in Hong Kong, drawing harsh comments from Beijing that raised doubts about the company's future in the world's largest Internet market.
Google said it intends to continue research and development in China, as well as maintain a sales staff there, even after closing Google.cn and rerouting traffic to the unfiltered search site in Hong Kong.
The decision comes amid heightened tensions between Beijing and Washington over a range of issues, from Internet freedom to the yuan exchange rate, economic sanctions on Iran and U.S. weapons sales to Taiwan.
China reacted to Google's move by saying the Internet search giant was totally wrong and had violated the written promise it made on entering the Chinese market, signaling a tough line over the dispute.
Analysts said it was possible Google's plans for other services in China, such as its Android smartphone software, could be endangered by this move, which moves the burden of censoring Google search results to Chinese authorities.
We don't see this as reducing tension. We see this as increasing or ratcheting up tension between the two parties, 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 had declared in January that it would stop censoring search results in response to what it said was a sophisticated cyber attack that it traced to China and increasing limits of freedom of expression during the past year.
Figuring out how to make good on our promise to stop censoring search on Google.cn has been hard, Google Chief Legal Officer David Drummond wrote in a blog post on Monday.
We want as many people in the world as possible to have access to our services, including users in mainland China, yet the Chinese government has been crystal clear throughout our discussions that self-censorship is a non-negotiable legal requirement, he said.
For the average mainland Chinese, the rerouting of search queries to google.com.hk is unlikely to make much difference unless they can get around government-imposed firewalls that block searches for sensitive topics like the Dalai Lama.
WHITE HOUSE DISAPPOINTED
The White House said it was disappointed that Google and the Chinese government were unable to reach an agreement that would allow the Internet company to continue operating its search services in China.
Mike Hammer, spokesman for President Barack Obama's National Security Council, said the United States opposes censorship and is committed to Internet freedom, but stressed that the White House did not anticipate this issue would cloud relations between the two nations in other areas.
The U.S.-China relationship is mature enough to sustain differences, and while we seek to expand cooperation on issues of mutual interest with China, we will candidly and frankly address areas of disagreement, he said.
China represents an important growth opportunity for Google, which has seen its growth slow in mature markets like the United States and Western Europe, even though it generates only a small portion of its nearly $24 billion annual revenue.
While Google is the world's top search engine, it held only an estimated 30 percent share of China's search market in 2009, compared to home-grown rival Baidu Inc's 60 percent. Google's decision on Monday, therefore, won't have an immediate impact on earnings, analysts say.
Shares of Google, which have fallen more than 6 percent since it 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 has operated Google.cn in the mainland since 2006, and employs about 600 employees in China, with roughly half working as engineers.
The company acknowledged that the ultimate size of its sales team in China will partly depend on the ability of mainland Chinese users to access the Hong Kong site.
Google is attempting to get around that self-censorship by operating search out of Hong Kong. But we've seen the Chinese government restrict access to other countries before and I don't necessarily see why that necessarily changes by going to Hong Kong, said Kaufman Brothers analyst Aaron Kessler.
China censors the Internet by requiring domestic operators to use filters to screen out banned images and words, and also operates a firewall to frustrate users trying to access overseas websites that are deemed unacceptable.
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.
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 Google acknowledged that the Chinese government could at any time block access to the services, which include Google search, news and images.
(Reporting by Alexei Oreskovic; Additional reporting by Edwin Chan, Gabriel Madway, Paul Eckert, Alister Bull, Melanie Lee and Chris Buckley; Editing by Tiffany Wu and Richard Chang)