It shouldn't be too surprising with China's history of censorship that they would ban iTunes from selling books and movies to their citizens. What's surprising is that they apparently allowed it for several months.
How could they? The communist party would have to literally read every book and watch every movie for approval, so to really go by the rules, the only content they could offer is media in favor of the cultural revolution. I doubt Apple even tried to play it like that, so why be surprised when it's shut down?
They don't have to read every book. People who actually read the books might just report/flag it. Consider why there's no porn on youtube? There must be quite amount of people tried uploading porn there.
There are bookstores (both online and brick-and-mortar) with a large number of books approved for sale in China, so if Apple stuck to selling those books, it would not be a censorship issue.
Apple needed to put more thought and effort into their launch if they were considering becoming a mainstay in a completely different political/cultural market.
Others have pointed out that China's closure to outside (software) tech. has helped them as an incubator, but really I think American companies have failed to bend their policies to the degree necessary to continue to exist (in China). Google for a while has tried to resist censorship, but it's really a question of whether a company wants the one billion Chinese citizens to have access to their products at all, or if they would like to be shutout.
There's an easy answer to this: The government provided the list of books and movies that were allowed to be sold. And Apple realized they couldn't make money selling only this list, so they dropped out.
