It's the best of times and the worst of times for Baidu (BIDU -0.60%)

A report out of T.H. Capital -- as retold by Barron's this morning -- paints a mixed picture of China's leading search engine. Baidu is experiencing a boost in traffic, but its share of the market continues to contract.

T.H. Capital points to Baidu's market share dwindling from 71.5% at the start of the year to 70.5% as of March 20. However, Baidu's page views and unique visitors have inched slightly higher -- up 0.9% and 0.6%, respectively -- since the year began.

The divergence is easy enough to explain. China's Internet market is growing quickly enough that Baidu's traffic can increase even as its market share slips.

If anything, a sequential uptick in sessions and users is impressive, since Baidu was actually calling for a 4% to 7% sequential dip in revenue for the first quarter just two months ago. Naturally traffic isn't the same thing as revenue -- and everyone's braced for a seasonally soft quarter -- but things may not be so bad for Baidu after all.

There's also an interesting nugget in the market share data. The same report finds that Qihoo 360's (QIHU.DL) share of the market has grown 10.4% to 13.5%. Is this problematic for Baidu? Absolutely. However, compare the two numbers. Baidu's market share has surrendered 100 basis points, but Qihoo 360's pop is actually 310 basis points. In other words, most of Qihoo 360's market share gains this year have come at the expense of non-Baidu players in search.

This isn't a surprise. It was Google, after all, that Qihoo 360 bumped out in going with a homegrown solution for its leading browser and security software solutions this summer.

Since Baidu and Qihoo 360 now combine for 85% of the Chinese search market, it's inevitable that growth for either company will have to come at the expense of the other. It will be an interesting battle to watch, but it doesn't mean that the market can't have two winners.

Google isn't any worse for the wear since Bing emerged as a rival a few years back, and Bing's market share in the U.S. is greater than that of Qihoo 360 in China.