BEIJING -- Amid worldwide gloom over the prospect of more interest rate hikes, downward selling pressure ruled China's markets Tuesday. The Hang Seng Index finished down 0.3% at 15,973, and the Shanghai Composite Index was off 0.3% to 1679. On Monday in New York, China names were mostly decliners. Sohu ( SOHU - Get Report) lost 2.9% to $24.90 and Linktone ( LTON) slid 0.7% to $6.70. Bucking the trend, Baidu ( BIDU - Get Report) rose 0.5% to $83.26. The stock market isn't the only place Baidu is gaining ground. Not only has it been gobbling up market share, but lately its chief competitor in China, Google ( GOOG - Get Report), has suffered major service disruptions there. Since last week, Google's site has been inaccessible to many local users. Though email service in China can sometimes slow to a crawl, it's rare for a Web site to be down for days at a time. Other websites, including Baidu, appear to be functioning normally. The service meltdown is a setback for the Mountain View, Calif.-based technology giant against the backdrop of its recent expansion drive in China. A call to Google's office in Beijing was not returned. In January this year, Google launched a China-based version of its site. A few months later Google CEO Eric Schmidt flew to Beijing for a ceremony to give the company a Chinese name and open a research lab there. But service snafus will hardly help Google as it attempts to compete with Baidu, which has surged to a lead position in the China search market. As of 2005 Baidu owned 57% of the search market, with Google lagging behind at 33% and Yahoo! ( YHOO) a distant third, according to Chinese research house iResearch. An analyst in Hong Kong said today he was not aware of any recent Google service interruptions outside mainland China. And some Internet users in China say they have not had problems using Google. Yet a number of Beijing residents report being unable to access the site. Tuesday, a Beijing firm that helps Google with advertising work said it had also not been able to pull up the site.
Both the English and Chinese versions of Google have been out of service. Attempts to access the sites return the message "Page cannot be displayed." The service disruptions also interfere with the use of unrelated Web sites that rely on Google as a search tool. Google's email service Gmail has been only intermittently available since last week. It's not clear what is causing the problems at Google. Just last month, according to press reports, Web surfers also had trouble accessing email accounts at Microsoft's ( MSFT - Get Report) Hotmail. The Chinese government censors the Internet, routinely deleting controversial content on politically sensitive topics (such as Taiwan, human rights, and Tibet) and shutting down Web sites it doesn't like. But there's no reason to think Google would have run afoul of bureaucrats, especially given the attention it's recently lavished on China. Indeed, Google has encountered criticism in the U.S. for its decision to bow to Beijing's wishes and cull sensitive topics from its search results there (Google includes a disclaimer telling users about the policy). Until it launched its China service this year, Google users suffered occasional service hiccups and slowdowns because its servers were based in the U.S., not in China. It's possible technology could also be the culprit for the recent problems. "My first instinct is to blame technology," says Dave Carini of Maverick China, a Beijing-based technology research firm. "Whenever something like this happens in China, a lot of people instantly start thinking of government conspiracies and the blocking of sensitive information. But what would be the point of blocking Google? There are many other places where you can search for information. And Google invests in China." In fact, two years ago Google acquired a small stake in rival Baidu, paying $5 million for a 2.6% holding. Earlier this year there was speculation that the cash-rich giant might want to make a bid for Baidu. But many doubt that Baidu would be willing to sell, given its current momentum.
"Baidu's market share in the highly promising Chinese search market continues to grow, despite increased investment from Google and an aggressive push by Sohu to enter the search market," says Piper Jaffray analyst Safa Ratschy in a May research note. He explains Baidu has "a more dominant position in China than Google has in the U.S.," adding, "We believe Baidu's popularity has continued to be strong and has so far held against Google's efforts." Expect Baidu to reap more benefits as long as Google's service is down.