According to the NYT article Surveillance of Skype Messages Found in China by John Markoff (1/10/2008), reporting on the discovery by Nart Villeneuve and published on Information Warfare Monitor, China monitors Skype text chats and archives the text and personal information of users whose chats contain various trigger words, such as "Falun Gong" or "milk powder". In the past, the appropriate American response would be something like "Those terrible Chinese! They violate their citizens' rights to free speech and communication! What dastardly dictators!", with the subtext that in America, and perhaps other nations of the so-called "free world", we are better because our governments uphold more noble rights. While such statements about China remain fairly accurate, the subtext has collapsed. The NSA illegally spies on American communications. European countries have taken to archiving, for several months or years, all email communications and record end points of phone conversations.
There are a few alternatives to Skype.They may not fully address the monitoring and censorship problems of Skype, but they may at least reduce the financial incentive to companies (such as Skype) to violate people's rights. One particularly interesting service is Jajah. This service calls both you and your destination number, setting up a possibly much cheaper communications channel depending on where they are located in the world and what telecom services they use, versus what may be available individually to the users. (There's a proper telecom term for this sort of service that escapes me.) This sort of functionality used to be a bit of a pain to set up yourself, if you could even find a company willing to handle it for you. Some global sim-card companies took advantage of this, and sometimes of their customers, by selling sim cards that let you use an equivalent service. Most of these sim card companies had expensive products, poor coverage, and lousy customer service. Jajah is more open, as you can use any phone or mobile, such as one using a locally-purchased sim card, and even offers free calls between Jajah users on some connections. It's an interesting service I will need to try out.
Update: Skype claims they didn't know about the problems with Tom Skype, the affiliate in China whose software was being monitored. We'll have to see how they handle this.
Breaching Trust: An analysis of surveillance and security practices on China’s TOM-Skype platform
Skype: We didn't know about security issues by Marguerite Reardon, CNET News, 3/10/2008.