HTC working with Chinese government on new OS, but is it a “new” OS or an Android fork?

Oh boy. According to The Wall Street Journal, HTC is betting big on China. So much so that they’ve begun work on a new operating system, one that’s completely in Chinese, and that prototypes are in the hands of Chinese government officials. The WSJ piece emphasizes that they’re not really sure if it’s a completely new, built from the ground up, operating system, or whether it’s an Android fork.

Let’s think this through, shall we? First point, who exactly is paying for the development of this operating system? If it’s HTC themselves, then what happens if the OS fails, will that cause to company to spiral into bankruptcy? Second point, why? What’s wrong with Android just the way it is? And why can’t HTC simply make a Chinese version of Sense that’ll make the local government happy?

Third point, and this is the really important one, how will Google’s relationship with HTC change if Google finds out that HTC is going to target the world’s largest smartphone market with an operating system that competes against Android?

This all smells like trouble to me, and something HTC shouldn’t be involved in. You?