Update: For more on this issue, read our follow-up post featuring responses from readers in China.

The Chinese government apparently knows pornography when it sees a link to it — but does it know how to encourage web innovation? Leading Chinese search engine Baidu, number two rival Google, and major Chinese web portals like Sohu and Sina face “severe punishment” from the government, because they allegedly allow users to find porn web sites, according to the Associated Press.

Porn is banned in China, but officials have had trouble blocking citizen access to porn sites hosted in other countries. That problem, however, has been present for years. Given recession-fueled job cuts and resulting unrest in China, one has to wonder if the porn issue is an excuse to cut the general population off from easily finding negative information about the economy — and the government online. One of the 19 sites singled out by the government today is Tianya.cn, a social site more focused on news discussion than porn-sharing. Aside: The government has also been busy going after political dissenters in recent days.

But the government claims that it previously asked Baidu and Google to make the removal of porn links in search results more “efficient,” the Associated Press reports. It’s unclear what the government expects, or how the web sites in question may have violated Chinese law or previously agreed-upon operating contracts with the government. A Google spokesperson in China tells the AP that the company hasn’t broken any law.

To be clear, the government hasn’t said exactly what the punishment will be for helping Chinese internet users access porn, but it could be a shut down, since the government apparently shut down popular Chinese video-sharing site 56.com for six weeks this summer due to what it deemed “inappropriate content.”

It’s nearly impossible for a search engine to completely remove links to pornography — even though Google, for example, offers a “safe” feature that largely prevents porn results from coming up in results. A porn site may use keywords and other terms that don’t automatically identify it as such within a porn filter. What’s more, the definition of porn is subjective. As U.S. Supreme Court Justice Potter Stewart said while trying to shape a legal definition in the U.S. decades ago, “I know it when I see it.” In this country, leading video site YouTube has been reworking its own definition of porn to try to cater to more sensitive viewers. Leading social network Facebook has even banned breastfeeding photos.

The problem is that the Chinese government has only to find a single instance of what it defines as “porn” in a search result on a site in order to justify punishment. Threatening the largest sites in the country in order to stop pornography is, if nothing else, a drastic response to a single issue.

This is bad for Chinese entrepreneurs

The timing now is suspect. The government tried to present itself as friendly to foreign news sites at its Olympic Games this summer — sites like the BBC were and still are up in the country. Strangely, though, the New York Times was taken offline for a time earlier this year. Meanwhile, the worldwide recession has hammered China’s export-driven economy in recent months, and so its growth and employment numbers aren’t looking rosy. Citizen unrest has been reported since earlier this fall, as factories have shut their doors. Some outside analysts are wondering if more concerted anti-government action is coming.

Meanwhile, the government has been trying to figure out how to shape the easy spread of online information to its advantage. It has been talking about ways it can use its state-run media organizations to report news about itself, a way to define coverage of major stories. That idea is a more timely and open way of breaking news than doing what it traditionally has done — slowly and methodically censoring news stories.

Threatening sites is a step in the opposite direction. Search engines — and the message boards and other information-sharing services provided by some of these sites — are a great way for dissenters to criticize the government regardless of what the government reports about itself. China’s political and legal structures are corrupt; the web is a way for people to hold them responsible, and so produce better laws and policies. A government-run publication even paid lip service to this idea yesterday.

Which points to a bigger problem. Stifling free speech — whether because of decency standards or political fear — is bad for innovation. By threatening, if not shutting down, the leading web sites in the country, the government is sending a chilling message to entrepreneurs and investors. Why create a valuable, generally useful service like a search engine if it’s going to be threatened if not shut down based on a shifting set of anti-porn standards? China’s 250 million web users make the country the single largest internet market in the world. Measures like this one seem self-defeating considering China’s larger goals and potential.