Google’s ability to operate any kind of Internet business in the world’s largest market hangs in the balance as China weighs whether it will renew Google’s Internet license, which officially expired June 30.

China has expressed dismay at Google’s rerouting of search traffic to an uncensored site in Hong Kong, but has not yet disclosed whether it will try to shut down Google in China. “Given that they’ve not said anything so far, it probably indicates that decisions at fairly high levels are involved and that [the Chinese government] understands that whatever decision gets made is going to get a lot of attention globally and will send a signal that goes well beyond China’s relationship with Google,” says Rebecca MacKinnon, a China Internet expert and a visiting fellow at Princeton University’s Center for Information Technology Policy.

“Their inclination will be to punish Google so that everybody stays in line,” MacKinnon adds. “But on the other hand, not renewing the license would send a broader signal about just how open the market is, or isn’t, in China. You’ve got President Hu Jintao getting ready to travel to the U.S. for a summit. A refusal of Google’s ICP [Internet Content Provider] license would certainly add to the pile of negatives in the relationship, so I imagine they are weighing that.”

In January, Google announced that, along with several other companies, it had been the target of sophisticated cyber espionage originating from China–and that it would stop censoring search results related to a variety of political topics, as China requires of all Internet companies operating in the country. The company followed through on March 22, when it began redirecting visitors from Google’s China site, google.cn, to google.com.hk, its Hong Kong-based site, where Google offers uncensored search in simplified Chinese. (Some search terms are still blocked by Chinese network filtering.)

China called this approach “unacceptable,” and last week, with the ICP license renewal looming, Google shifted gears. It made Google.cn a landing page that seems to offer the usual field to enter search terms–but clicking anywhere on the page takes visitors to Google.com.hk. “This new approach is consistent with our commitment not to self censor and, we believe, with local law,” Google’s senior vice president and chief legal officer, David Drummond, wrote in a June 28 blog post. “We are therefore hopeful that our license will be renewed on this basis so we can continue to offer our Chinese users services via Google.cn.”

One researcher says the change, though seemingly subtle, is significant enough to possibly cost Google some users. “Using Google from Shanghai, I noticed the extra click,” says Guobin Yang, a Columbia University sociologist. “One extra click may sound easy, but it is a huge deal for users, and I’m pretty sure Google will lose users because of this.”

As of Friday, there was no reaction from China on this move. Chinese authorities can shut down any website that fails to obtain or renew an ICP license–issued by the Ministry of Industry and Information Technology.

Google has much at stake. Its online offerings in China include a video search service (video.google.cn), online shopping (www.google.cn/gouwu), maps (ditu.google.cn), translation (translate.google.cn), and other services under the Google.cn domain name. “Discontinuance of Google.cn will mean discontinuance of these services, and therefore the real end of Google’s China presence.

Yang said from Shanghai that such a departure would be a big deal precisely because the Chinese Internet market appears to have such a strong future. “Having just come from a panel of speakers from major Internet businesses in China, I saw how optimistic Chinese high-level Internet entrepreneurs are about the Chinese market. They are confident about the dynamism of the industry. Who would want to leave such a market?”

If China renews Google’s license, the government could still block Google.com.hk, which would force users to obtain special circumvention software, such as Psiphon or Tor, to use proxy computers outside of China. Or, if China cancels the license, Google.cn would no longer function, and Chinese users seeking to use Google search would have to directly type google.com.hk (or any Google home page from a different country) into their browser. If that home page was blocked, they’d have to use circumvention software to reach it.

Canceling Google’s Internet license could also affect the pace of innovation in China. “If Google can’t compete in that market, it makes the market less competitive,” MacKinnon says. “It may well strengthen Chinese players in the short term, but it also results in a somewhat more closed and less global environment, which some people who are quite prominent in the Chinese Internet industry have warned may, in the long term, affect innovation in China.”