Now that Google (GOOG) has re-directed search requests from China to its servers in Hong Kong, the story surrounding Google’s status in the world’s most populous country is entering a new chapter. What’s going to happen next will have an impact on more than just supremacy in search advertising.

Since the beginning of the year, shares in Chinese search company Baidu (BIDU) have gained nearly 50%, mostly as a result of Google’s deteriorating relationship with the Chinese government. Baidu’s share price is now roughly equal to Google’s, even though the Chinese company’s revenue is still less than $1 billion to Google’s $24 billion.

Google’s move to Hong Kong caused Goldman Sachs (GS) to lift its price target on Baidu from $575 per share to $675 per share. Kaufman Brothers has raised Baidu from “Hold” to “Buy” and raised the price target from $540 to $690. There appears to be a race to crown the next king of search now that Google has stumbled.

News of Google’s death in China is greatly exaggerated. In fact, the move to Hong Kong is a very shrewd step in the battle with the Chinese government. Hong Kong enjoys a special status in China, and retains much of the independence it had before the handover in 1997. By moving to Hong Kong, Google raises the stakes in its battle with the government of censoring search results.

Google’s senior vice president for corporate development and its chief legal officer wrote on the corporate blog yesterday that the company’s move to Hong Kong is “entirely legal and will meaningfully increase access to information for people in China.” If the government blocks access to the Hong Kong-based servers, it risks damaging Hong Kong’s status as a special administrative region.

The government can, but is unlikely to, shut down Google’s Hong Kong servers. The government can, and is likely to, filter search results from Google’s Hong Kong servers. Depending on how sophisticated the government wants to be, it could either filter the search results line by line or, more simply and thoroughly, just return a “not available at this time” message. The government could also just block access to Google.cn, nullifying the server re-direction to Hong Kong.

Google, with about 35% of China’s search market, doesn’t really care about the revenue at this point. 35% of a billion dollars is not going to make or break the search leader. Microsoft (MSFT) and Yahoo! (YHOO), now joined at the hip, are the leading contenders to pick up Google’s share, so the big jump in Baidu shares seems even more premature.

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