Baidu, the Chinese internet search leader, cut its fourth-quarter revenue guidance yesterday after suspending thousands of merchants that were selling dubious medical products from its paid-search service.

The company, by far the most popular search engine in China, with Google a distant second, said it was also affected by the economic slow-down, which was hurting online marketing in machinery and franchising in particular.

The company, which is based in Beijing, expects its quarterly revenue to range from 890 million yuan (£87 million) to 900 million yuan. The company previously forecast revenue of about 1.06 billion yuan.

Baidu pulled the search listings last month after a programme on state-run China Central Television reported that several medical companies that had purchased rights to popular search terms did not hold medical licences. Some have returned to its paid search listings after submitting the required licences, it said.

Yesterday Baidu said it had also removed some questionable paid search listings outside the medical sectors after an inspection of its customer base.

Baidu shares on Nasdaq in New York rose $6.74, or 6.47 per cent, to trade at $111.30 by the close. The stock had fallen from a 52-week high of $397.70 in early January to hit a low of $100.50 on Wednesday after the medical licence scandal.

Robin Li, chairman and chief executive, said: “I am confident that Baidu will enhance our market position as we continue to evolve our business model in line with the rapidly changing dynamics of our market.”

Baidu said that it was testing a new online marketing and sales support system. The company promised last month to overhaul its operations after the state television show said it allowed unlicensed medical services to buy high search rankings to win more customers.

The search giant, one of China’s leading internet companies, was accused of letting the unlicensed services pay for prominent positions on its pay-for-performance search platform, netting them more “clicks” for expensive but useless treatments. The company responded by sacking staff who helped to forge documents for unlicensed suppliers.

The television programme highlighted several people who used Baidu to search for treatments and were steered to unlicensed and expensive hospitals or medicines that failed to cure them. One patient told state television that he spent more than 10,000 yuan at one Baidu-boosted clinic but the treatment was ineffective. He said he was later cured at a public hospital for 100 yuan.

The unlicensed clinic paid Baidu 16.56 yuan per click to get a prominent ranking, the programme said.

JPMorgan cut its 2009 earnings forecast for Baidu by 19 per cent on Wednesday, citing reduced advertising spending by small and medium-sized companies, as well as volatile medical and pharmaceutical advertising sales, which account for 10 per cent to 15 per cent of Baidu’s revenue.

However, the bank maintained its target share price of $300 with an “overweight” rating.

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