Google (NASDAQ:GOOG), the California-based search engine giant, made good on its promise to stop censoring results in China on Monday evening, upping the stakes in its showdown with the Chinese government. Google announced in January that it would end its voluntary censorship of its China search service following a series of attacks on email services from China-based hackers. The Chinese government requires that offensive content be stripped from web search results, including politically sensitive materials and any sites critical of the ruling party.
Google began redirecting Chinese users to its uncensored Hong Kong site on Tuesday, a move the company hoped would allow it to make good on its commitment to ending censorship in China while still keeping a foothold in the rapidly-growing Chinese market. However, Chinese government computers were either filtering link results or blocking objectionable content, preventing Chinese users from accessing the unfiltered results.
The ball is seemingly in the court of the Chinese government now, and many analysts think a complete shutdown of Google’s Chinese search service is inevitable. But others think the government may be wary of frustrating Google users, who tend to be educated and vocal. State-run news agency Xinhua reported that one Chinese official called Google’s decision “totally wrong,” while news reports accusing Google of politicizing the Internet popped up as well.
Tech Sector Impact
While these latest developments obviously have immediate ramifications for GOOG stock, they could also have a longer-term impact on China’s technology sector. Other search engines with large market share in China stand to benefit tremendously if Google days in China are indeed numbered. The largest of these is Baidu (NASDAQ:BIDU), which has nearly 60% of the Chinese search market according to some analyst estimates. That figure could surge well above 90% if Google pulls out (or is shut out) of China.
Fallout from the blowup wasn’t limited to search engine firms, and not all Chinese tech companies would necessarily benefit from Google’s departure. China Mobile, China’s largest cell phone company, will now reportedly scrap a deal that had placed Google’s search engine on its mobile Internet home page. The second-largest mobile company, China Unicom, will reportedly cancel the start of a cellphone based on Google’s Android platform, a major setback for a product launch expected to be tremendously popular.
The extent to which these firms are being pressured by the Chinese government to sever relationships with Google is unclear, although some reports indicate the government is actively encouraging Chinese businesses to distance themselves from the company.
As the possibility of Google shutting down its China offices has increased in recent weeks, that company’s Chinese partners have become increasingly concerned over the future of their business operations. Last week, 27 advertising resellers sent a letter to Google demanding an explanation of how they will be treated if Google.cn is shut down.
China Tech ETFs in Focus
For investors looking for exposure to China’s technology sector, there are two primary options:
- Global X China Technology ETF (CHIB): This ETF tracks the performance of the S-BOX China Technology Index, a benchmark that includes China’s leading Internet companies, telecommunications stocks, and software firms.
- Claymore China Technology ETF (NYSEARCA:CQQQ): This ETF is linked to the AlphaShares China Technology Index, a benchmark that includes about 33 Chinese tech companies. Many of the index components will be impacted by the ultimate resolution to Google’s standoff with the Chinese government; some stand to benefit, while others could see their operations impacted adversely.
Disclosure: No positions at time of writing.