The FT reports that Google (GOOG) has made all the necessary plans to close its Chinese search engine business and is “99.9%” certain it will shut the operation down shortly.

Li Yizhong, minister for industry and information technology, told Google that it could not violate local laws which means that it must censor its search results in the country. Google management has stated that it wants to stay in China but is unwilling to censor results. The current friction between the search engine and government began when hackers broke into Google servers in China and compromised some Gmail accounts. The hackers have not been identified.

The Chinese seem to have won the confrontation. Google needs the market for future growth. China has nearly 400 million people online by some estimates. Although local operator Baidu (BIDU) is the N0.1 search engine in the People’s Republic, Google holds the No.2 place. Yahoo! (YHOO) and Microsoft (MSFT) have indicated that they will stay in China which gives them a ready chance to expand their search businesses if Google is gone.

Google’s dominant position in search is in the US and Europe where the numbers of people on the internet are not growing rapidly.

Google’s plan is to close Google.cn, its local search service in China, but the firm will keep an operation on the mainland. The FT quotes CEO Eric Schmidt as saying.  “It’s very important to know we are not pulling out of China,” Eric Schmidt, Google’s chief executive, told the paper. “We have a good business in China. This is about the censorship rules, not anything else.”

It is hard to see what Google will have left in the People’s Republic if its Google.cn operation no longer exists. Google may decide to continue to boost the expansion of its Android mobile operating system. China has 700 million wireless subscribers, most of them customers of China Mobile (CHL). Google has a strong relationship with Chinese handset manufacturer HTC, and Motorola (MOT) says it will begin to sell an Android-powered phone in China shortly.

Google may have a way around some of the Chinese censorship rules because some PCs and handsets in China will be able to access Google sites based outside the mainland. The Chinese government can block most of this access but it is unlikely to be able to block millions of people trying to use Google by getting data from servers outside the country’s borders. The tension between Google and the Chinese government is not likely to end if Google.cn is closed.

Douglas A. McIntyre

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