Google has always had plenty of balls. It stood up to gov when it asked for IP addresses in (supposed) child pornography case. The issue then was that it was overly broad, and *our* gov would not guarantee it would not use the info for other purposes. Google said "hell no" and went to court, and got the data anonymized and MUCH smaller amount. In the meantime, Y!, AOL, and Mr. Softee - no balls between 'em - had already complied.
I think Google sincerely thought they could change China gradually from the inside, so that is why they allowed censorship (althought they did indicate that the data was censored). When they realized that was not going to work - that China was just getting bolder - they used the attack as a fake reason to back out.
Balls all around at Google.