This is not a small incident. This will have large repercussions, economically and diplomatically for the US, and possibly socially for the Chinese. Right now, the Chinese gov't cannot block Google.cn.... the unfiltered servers are behind the great firewall, and uncensored results regarding the Tiananmen massacre in 1989, the riots last year, the various human rights abuses in Tibet, everything, are now viewable to the Chinese people.
The Chinese gov't will be running around in a frenzy right now, figuring out who to blame, who to sacrifice to us, and who to throw in jail. This is a huge loss of face for the Chinese government. Not only were they caught red-handed (that Google is willing to pull out of the country entirely is indication that they know exactly who did this, where they were, and how they did it, and that this was gov't connected), everything that was done has been laid bare and turned over the the US government. As I said, a huge loss of face; but more importantly an even larger loss of strategic position.
Chinese spokespeople will be working long hours this week. They will say nothing publicly until the central government can figure out how exactly to spin this into them throwing Google out for breaking Chinese laws. Anything before that is a sign of true panic behind the scenes in Beijing. The fact that they have not yet blocked Wikipedia, however, is a sign of their initial confusion.
This is a big deal. A lot is riding on how China responds to this, and more for the Chinese than for Google. Watch this carefully.
01/13/2010 0948AM CDT - Google.cn has been at least partially re-censored. Searching for "Tiananmen 1989" brings up fewer images of the massacre, more modern tourist photos. Main search results still bring up results not usually accessible i.e. the Wikipedia entry on the massacre. Searches for "Falun Gong" bring up equal amounts of Chinese propaganda and factual information (normal results from Google.cn are 100% propaganda).
01/15/2010 - Sources indicate the US gov't is going to send a diplomatic note to China asking for a formal explanation of the cyberattacks on Google and several other companies. China will probably respond by denying all involvement, claiming itself as a victim of attacks as well, and trying to discredit Google (but not by name) for "propogating pornography."