I wonder what China will do about that. Just add it to the blocked sites list? Probably. It doesn't sound like Google are going to expand the HK servers so they probably don't see that situation being a permanent one. They probably just want to force China's hand.

Not yet. Maybe if Google looks at the site metrics and sees that their loyal fanbase hasn't moved to Baidu (the OTHER popular search engine in China) or whatever then they'll up the servers and upgrade them.

Why would they need to expand the HK servers? That is, if they even have servers in HK. Google routes search requests along its whole infrastructure, only the homepage differs.

Well they'd need increased infrastructure of some sort to cope with the potential millions of new connections.
I thought google maintained servers locally for "pages from <countryname>" searches and cached stuff so they don't have to pay an arm and a leg for transport for commonly searched terms.

Eh, Google is a business. I am pretty sure they didn't do this out of the goodness of their hearts. It was partly to give the finger to China (probably over the hacking issue), but also because it is a PR move. Truly, the only thing I expect any company to do is to try to increase the size of their shareholder's wallet. I only become uneasy when i can't figure out how what they are doing will meet that goal. This case seems pretty cut and dried.
Seems like a win/win scenario for Google. Whether China backs down (is it pig flying season already?) or Google leaves and never comes back, Google comes off smelling like a rose.

This doesn't change a bit the fact that Google is evil and Schmidt is an asshole.....

Because it would be nowhere near as fast if it was all from one geographical location. Especially when you're trying to meet the demands of a vast country like China.
In order to do this legally they can't do it within China itself, obviously. So that means they're most likely going to sell up and move out of China altogether. They're going to need to provide an alternative nearby and apparently that means HK.

" What, so you use Lycos for your search? "
yahoo search and Baidu