China would turn Snowden over to US authorities only in exchange for the return of Chinese protesters given asylum in the US.

The "China is an oppressive regime" meme makes up a lot of US propaganda and is used to justify all kinds of policies. So the US is put in the awkward position of not being able to engage in the usual diplomatic trade.

Hong Kong is useful b/c it represents the future of Chinese society and is a concentration of wealth and influence. By letting Snowden stay in HK, China can appease its own population while also appearing to stand strong against the US government's demands.

The best hope for the USG is that this blows over. Snowden seems fairly savvy about the media's role and if he's able to continue to shape the discussion there might actually be meaningful outcomes.