By Google's grace, China saves its face

China gave Google Inc approval to keep operating its Chinese search page, resolving a months-long censorship dispute that had threatened its future in the world's top Internet market.The move, announced by Google on Friday, removes another thorn in U.S.-China relations and reflects Beijing's desire to be seen as friendly to major foreign companies in spite of ideological differences, analysts said.

Shares of Google rose 2.4 percent as the news erased some concerns that China would eject the company for taking a hard line against Internet censorship. But analysts said Google's position in China remained fragile and that the country likely would account for a fraction of Google's revenue for some time.

"It's good for Google that they still have some presence. But they're clearly in a more compromised competitive position," said Ryan Jacob of the Jacob Internet fund, which holds Google shares.

"Google is going to have a very difficult time gaining share, and will probably lose share over time."Google embarrassed China in January by drawing global attention to Beijing's Internet censorship practices, a function of the government's belief that keeping a tight grip on information helps it maintain control.

The Internet company also accused Chinese hackers of orchestrating a sophisticated cyber attack on Google and other major U.S. companies.Google then declared that it was no longer willing to offer censored search results. This exacerbated tensions between Washington and Beijing, which were also sparring over China's currency, U.S. arms sales to Taiwan, and Tibet.

Washington has forcefully argued against Internet censorship and demanded that Beijing investigate and explain the alleged cyber attacks.
Over the months, tensions between the two countries have eased. But analysts said that while the United States would likely welcome the Google agreement, deeper divisions over freedom of information, Internet policy and cyber security would likely continue.

Google said on Friday that China had renewed its webpage license, which means it can continue to run the Chinese language search site google.cn. There was no immediate comment from the Chinese or U.S. governments.Last week, Google offered Beijing a face-saving compromise: it stopped automatically rerouting google.cn to its uncensored Hong Kong site. Now, visitors to google.cn must click once to go to the Hong Kong page.

Analysts said Beijing had sent a reassuring signal to foreign businesses that it would play by its own rules while keeping an innovative global company such as Google in its domestic market, where Chinese companies can compete with and learn from it.

"They want Google there," said Rebecca MacKinnon, a China expert at the Center for Information Technology Policy at Princeton University. "The Chinese government clearly sees Internet and mobile innovation as a major driver of its global economic competitiveness going forward."China, the world's No. 3 economy, has made no bones about its desire to attract foreign investment and technology.

But despite Beijing's eagerness to project a pro-foreign investment image, executives from multinational companies have long complained about Chinese policies that encourage home-grown corporations over foreign ones.General Electric Co's Chief Executive Jeff Immelt was cited by the Financial Times newspaper as saying in July that he felt Beijing was growing increasingly protectionist, and suggested his conglomerate was eyeing prospects elsewhere.

Analysts estimate Google's revenue in China at $300 million to $600 million out of its $24 billion annual revenue. It has around a 30 percent share of China's 7 billion yuan ($1 billion) search market, which local rival Baidu Inc dominates. Baidu shares, which have soared about 75 percent since Google's problems in China emerged, fell 1.6 percent.

Elinor Leung, an analyst with CLSA in Hong Kong, expects traffic from Chinese visitors to continue to drop for Google and for advertisers to turn to local choices like Baidu.
"This doesn't really change anything about Google's position in China. The redirection to its Hong Kong site is ongoing so it is the same problem as before," said Leung.

Google's difficulties in China come at a time when investors are concerned that the company's growth rate is slowing. Google faces a plethora of regulatory inquiries and is spending heavily on new but unproven businesses, such as its Android mobile operating system. Its stock is hovering at its lowest level since September 2009, and has declined 26 percent in 2010."Google has been a company which people have invested in because they expected the company to outstrip expectations -- and it's not that company anymore," said Hamilton Faber, an analyst at Atlantic Equities.

Its "growth outlook is certainly slowing from where we were a few years back. The company seems to be back on the path of heavy levels of investment. We are back into a situation where margins are declining," Faber said.China offers Google huge arena for growth. With nearly 400 million users, China has an Internet penetration rate of 25 percent with huge market opportunities in search, e-commerce and online gaming, analysts said.

"China doesn't necessarily want Google to exit the country. China just wants to exert its control over Google in its country," said Colin Gillis, BGC Financial's research director.He said disputes between Google and China over censorship could flare up again.

"It's going to continue to be a distraction for management. It may look like a positive for now, but it doesn't change the fact that Google is still offering uncensored results," Gillis said. "It's going to continue to be a drag on management's focus."In our opinion, there is no chance for Google to earn profits in China in the near term," Gillis said.