It seems they want to make an example out of Google: "If you disagree with our censorship, this is what will happen to you, too", and create chilling effects for any other company who's considering being "moral" in China.
The Chinese government is going through a transition period at the moment, so much is undecided. But it is unfortunate (especially being Chinese) that the central government is becoming more conservative overtime (politically conservative, fiscally liberal). I do hope that this is just a phase rather than something persistent.
With regard to foreign policy, the US had been playing a very interesting game of hard-soft combination. Obama and the executive committee had been relatively soft on the Chinese government. At the same time, the US representatives to WTO and other trade organization had been pretty persistent. I don't know how things will turn out, but I am pretty certain that the US government will not impose sanction on China. That is a foolish move giving the trade and the status of China in the global market.
It appears to me that They're opening up their economy more to western influences, but they're trying to maintain control of their own party and keep everybody in line, similar to what Putin has done in Russia.
My theory is that as they open up more economically, the citizens will be "enlightened", so to speak, and there will be more protests. If China officials know this, they may be trying to stop this enlightenment before they're put out of power.
China is producing lots of consumer goods for American companies (and global markets), and China doesn't take criticism lightly, so if they get criticised, China will cut off trade.
There was an Anti-Counterfeit goods event at London with lots of big name execs from corporations there who were trying to stop counterfeit goods. Not one of them wanted to name the perpetrators, who was responsible.
I wonder if Obama will do this to China, too:
http://arstechnica.com/tech-policy/2012/11/us-imposes-sancti...