Hello ROC, the following is my personal thought, it does not reflect the thought of the initiator of the letter (with whom I didn't talk about the letter), nor does it reflect the opinion of the board.
At first I don't agree with the most important arguments in your message. If we do an indepth analysis, the final reason for us don't perform well in China is government favoritism: We cannot initiate community program from the Foundation because the chinese law prohibits foreign organisation to be active in China. If we set up an office in China, we must create a chinese affiliation and this affiliation must bough to the censorship. When Jimmy Wales met vice minister Cai last year and asked him about the possibility of establishing a chapter in China he got a very blunt No as answer.
We don't get a good search engine ranking in China because the search engine companies purposefully ranked us low. Google.cn and google.de give totally difference ranking orders if you type in a word.
Our community in mainland China is not dwindling. It is growing, this shows the statistics we gathered so far. It is growing in a low level, that is true, but it is growing. As the Task Force China analyzed, this is our basis, and we do have virtues that our competitor don't have.
Even if the Foundation would not step in China and make China the focusing point for its investment it does not mean that China is not important for the Foundation. Jimmy and I was in China every year in the last years. China is always a topic, on every of our board meetings. Kul was also traveling through China and working out possible business contacts. The Foundation financed the half of the budget of last year's Chinese Wikipedia Conference and would not hesitate to finance further yearly meetings if such meetings can be hold. This all is more than what the Foundation had ever paid for a lot of other countries in the world. And it shows the dedication and the attention the Foundation is paying for China and would also pay for the future.
If I have 100 dollars as WMF and I invest the 100 dollars in China, the possibility is big that I lost 99 of the 100 dollars simply because tomorrow the government can block my site totally and close my office. We do lost a lot of good participants by the last blocking, I can name without hessitation more than 5 very active users that we lost because of the last block, and there are surely more. We are not blocked since August 2008, that's true, but it is not granted that this would last for ever, or even for the next five years. The risk is too big for me to spend all the 100 dollars in China. As you said, our money come from people. To take such a big risk with these people's money is for me too big a risk.
I have no doubt that if you are facing the same choice you would make the same decision.
Wing, investments do not need to have any relationship with a chapter, nor do we have to have an official organization. Merely promoting the Chinese language projects in general by encouraging cross Wiki collaboration, discussions with Chinese universities, or collaborating with Chinese scholars who do not currently reside in China are just some of the many possibilities to not have to worry about government control. At my undergrad, there were 5 exchange professors from China. At my other schools, there were many exchange students and scholars. It would not be hard to tap into this vital resource.
So do it. :) Really, that doesn't take investment from the Foundation. There's no reason chapters or other parts of the Movement can't do that. This is about empowerment, at its very base: by saying that "This is not a priority for the Foundation", the Foundation is opening the door for someone else to take it on as a priority, without worrying about whether they're competing with a program the Foundation has, or is making plans to have.
It seems to me that this is a perfect opportunity for someone to really take this and run with it.