Wouldn't Google refusing to comply with China's requirements and therefore not offering service to Chinese users at all be an even more absolute form of censorship?
That depends if you think a half-truth is more dangerous than a lie.
Why would you assume that if Google is willing to censor in China, for profit, that it won't censor anywhere else including America?
CNN censored in Iraq, so they could stay in the country (and protect their profit margin). CNN censored information to Americans. Google is declaring a willingness to censor in order to increase its profits, China today -- America tomorrow?. That's the bottom-line.
Not having access to good search engines would be crippling to China's web users. Now, by providing a censored search engine, China can restrict access to the uncensored Google