Some good comments at TechCrunch:
1. Google’s business was not doing well in China. Does anyone really think Google would be doing this if it had top market share in the country? For one thing, I’d guess that would open them up to shareholder lawsuits. Google is a for-profit, publicly-held company at the end of the day. When I met with Google’s former head of China Kai-fu Lee in Beijing last October, he noted that one reason he left Google was that it was clear the company was never going to substantially increase its market share or beat Baidu. Google has clearly decided doing business in China isn’t worth it, and are turning what would be a negative into a marketing positive for its business in the rest of the world.
2. Google is ready to burn bridges. This is not how negotiations are done in China, and Google has done well enough there to know that. You don’t get results by pressuring the government in a public, English-language blog post. If Google were indeed still working with the government this letter would not have been posted because it has likely slammed every door shut, as a long-time entrepreneur in China Marc van der Chijs and many others said on Twitter. This was a scorched earth move, aimed at buying Google some good will in the rest of the world; Chinese customers and staff were essentially just thrown under the bus.
Actually, recent reports estimate their 2009 search market share at around 30 percent, which is nothing to sneeze at. They could have had a good business in China, although I agree with Kai Fu Lee that the government would never let them dominate the market there the way they do in the rest of the world.
The hacking used trojans injected via a zero-day vulnerability in Adobe (PDF file attachments) [Edit: or was it an IE browser problem? And were the hackers really Chinese -- why codename Aurora?]. The claim that these attacks on multiple companies were coordinated by Chinese intelligence services is plausible but far from proven.
It's important to emphasize that the Chinese government is not monolithic. The parts of the government concerned with economic growth and technology development will be asking some hard questions of the intelligence apparatus about this. No economic planner wants high tech companies like Google or Adobe to stop operating in China as a consequence of security risks.