Google shut its mainland Chinese-language portal and began rerouting searches to its Hong Kong site, unleashing Beijing's ire and prompting worry over its prospects in China.
China lost little time in warning Google that its spurning of self-censorship had angered the one-party government, wary of ceding control over China's 384 million Internet users.
Google's decision comes during 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.
Google startled the world and the business community in January when it said it might quit China over censorship and after suffering from a sophisticated hacking attack that it said came from within China. Beijing has denied it was involved in any hacking.
Google's public complaints made a parting of ways with China's government hard to avoid.
It was not unexpected. How do you square the circle in a situation where your business globally depends on the free flow of information and one (side) restricts that? Joerg Wuttke, president of the European Union Chamber of Commerce in China, told Reuters of Google's retreat.
Google's Internet move to Hong Kong, a self-administered territory under Beijing's rule that is free of many mainland restrictions, may not mark the end to contention.
An unnamed official from China's State Council Information Office, which helps oversee Internet rules, told the Xinhua news agency that Google had violated the written promise it made on entering the Chinese market.
Chinese Foreign Ministry spokesman Qin Gang would not say directly whether his government considered Google's new Internet arrangements legal, merely noting that government departments would handle it in accordance with the law.
The Google incident is the individual act of a commercial company. I don't see that it would have any impact on China-U.S. relations, unless some people want to politicize it, Qin told a regular news conference.
Google said it intends to continue research and development in China, and keep sales staff there. But the company is likely to be closely watched by officials, possibly emboldened after months of friction with Washington.
Internet users in China rerouted to Google's Hong Kong website, Google.com.hk, were still unable to access sensitive websites, because China's government firewall continues to filter all content accessible from the mainland.
Searches on the Hong Kong website from mainland broadband lines for sensitive news and discussion about jailed dissidents and banned organizations proved erratic.
Some gave links to sites that google.cn previously did not. But these pages could not be opened. Other searches for the same sensitive topics returned a blank page.
Google.com can still be accessed from China. But, as always, links for sensitive topics cannot be opened.
Analysts said it was possible Google's plans for other services in China, such as its Android smartphone software, could be jeopardized by its move.
Ordinary (Chinese) Internet users won't be much affected, because the only difference they'll see is that the burden of censorship has shifted from Google to the government, said Wang Junxiu, a Beijing-based Internet entrepreneur who has campaigned against online controls.
But Google's business may take a hit. Advertising may fall, and (Chinese) companies that have invested in joining up with Google innovations and content will be hurt, said Wang.
A CLOUDED FUTURE
Google has steadily grown its market share since 2006 when it only had about 10 percent of the market.
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 with 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 January when it announced plans to stop censoring searches in China, closed Monday's trading session down $2.50 at $557.60. Shares of Baidu, which have soared more than 40 percent during the same period, finished up $10.07 at $579.72.
Google's troubles in China are not unique. Many foreign companies such as eBay and Yahoo! have failed to make headway in the market due to localization problems and stiff domestic competition and have pulled out.
China requires Internet operators inside the country to block words and images Beijing deems unacceptable. Google.cn used such a filter.
Internationally popular websites Facebook, Twitter and Google's YouTube are blocked in China.
A former British colony, Hong Kong 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.
I don't think it's sustainable for Google to conduct rerouting of traffic, said Edward Yu, chief executive of Analysys International, a Beijing-based research firm specializing in technology issues.
The thing that makes the government unhappy is this kind of gesture. That Google will not follow (the rules), and that gesture will anger the government so they may set up barriers against Google.
(Additional reporting by Ben Blanchard, Alan Wheatley, Alexei Oreskovic, Edwin Chan, Gabriel Madway, Paul Eckert and Alister Bull; Editing by Jean Yoon)