Will China’s Baidu (BIDU) be able to capitalize on the troubles Google (GOOG) is having with the Chinese government and become the leading search engine in the world’s most populous country? Or, will Google find a way to continue its operations in China and turn Baidu into an also-ran in the search engine wars, as it has done with Yahoo! (YHOO) in the rest of the world?

Baidu operates its search engine within the restrictions set by the Chinese government. Google, which has also followed the rules and taken some heat for it, is currently in discussions with the government to drop the restrictions. Google has said that if it cannot operate freely, it will pull out of China.

So what’s at stake in the Chinese search advertising market? The 2009 figures for search engine advertising in China are still quite small — just over $1 billion. The percentage increase is large, however, up 38.2% from 2008. Baidu’s market share comes in at 58.4%, while Google’s share is 35.6%, according to research firm Analysis International.

Google’s threatened exit from China has given Baidu shares a boost, but in most cases analysts are upgrading Baidu shares only to “neutral,” although some are hinting that Baidu stock could rise 20% in 2010. That seems more than a little aggressive.

Even if China’s search engine market grows 30% in 2010, the total market is still going to be smaller than $1.5 billion. If Google leaves, Baidu may pick up the lion’s portion of Google’s share, but the Chinese company’s revenues will still not rise much above $1 billion.

There is little evidence that search engine advertising in China is taking off. The total take for Internet advertising in China in 2009 was about $3.3 billion according to Chinese research firm iResearch Consulting Group.

How can a share of Baidu stock be worth more than $400 on those kinds of numbers? Analysts are betting on things to come. The Chinese Internet market is potentially huge, and it is growing quickly. Estimates of Internet users in China already top 380 million, more than the entire population of the U.S.

Direct correlations between the number of Chinese Internet users and the growth rate of Baidu are risky. There is no evidence that Chinese consumers have reacted to advertising in the same way that U.S. consumers might. Surely if search engine ads were having an impact on sales, the total ad spend for China’s 384 million Internet users would be more than $1 billion.

Google’s Chinese revenues in 2009 were around $300 million. The company’s total revenues top $22 billion. Baidu estimated revenues for 2009 are around $636 million. Unless Baidu can figure out a way to boost interest in search engine advertising, it will take the company decades to grow to Google’s size.

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