In a news conference attended by a high-ranking Chinese official, Yahoo said it has inked a deal to set up a new Internet company with Beijing Founder Electronics Co, a wholly owned subsidiary of Founder (Hong Kong) Ltd.

The venture will run YahooChina, a new Beijing-based Internet site with content targeted at the country's exploding population of Internet users.

"This is a joint venture that we have contemplated doing for many, many months," said Yahoo founder Jerry Yang. "We have consulted and been in constant dialogue with a number of agencies and authorities in this regard." Still, the company's announcement was surprising, coming less than two weeks after China's top telecommunications regulator said current laws prohibit such investments.

In highly publicized remarks last week, minister of information industry Wu Jichuan pointedly ruled out use of overseas capital by Internet service providers and by Internet content providers like Yahoo. Explaining the regulations last week in an interview, an MII spokesman said "Internet companies, including ISPs and ICPs, are using telecommunications lines to do value-added telecommunications business... . Under these circumstances, according to the spirit of the original regulations, they are all prohibited from taking foreign investment."

Reached Friday, the MII spokesman declined to comment on Yahoo's deal, but said the ministry hasn't budged on its interpretation. "Last time I was very clear, and there has been no change whatsoever," he said. Officials from Yahoo and Founder expressed confidence Friday in their new company's legal status.

"Especially in this environment, there will be clarifications and extensions of the current set of regulations," said Mr. Yang. "But certainly what we are proposing to do today is within the bounds of the law." Yahoo executives wouldn't specify the cost or corporate structure of the new venture.

But Heather Killen, vice president of International Yahoo Inc., said the company is planning to put its own funds into the venture -- ban or no. "You can't make an omelet without breaking eggs," she said. One possible reason for the company's confidence may be the apparent support it has enlisted from the ministry that issued last week's ban. Yahoo and Founder executives said the new YahooChina Web portal will be hosted by Beijing Telecom, which is controlled by China Telecom, the country's largest telecommunications company. Formerly a corporate division of the MII, China Telecom continues to maintain strong ties with MII. Ribbon Cutter.

Adding to Yahoo's show of official endorsement, MII vice minister Qu Weizhi personally presided over the Web service's electronic ribbon cutting Friday, mounting the stage with Yahoo's Yang to officially activate the site. Yahoo officials declined to say whether the company has received any official assurances or dispensations for its joint venture. It said the deal wasn't rejigged after last week's regulatory wrinkle. "We haven't specifically changed any of our plans in order to be here today," said Killen.

Killen said the company hopes new regulations, which the MII has said it is preparing to release by the end of this year, with diminish the confusion. "We look forward to further clarification of the government's position, and at that time we will be sure, through our partners here at Founder as well, to fully comply with the letter of the law," she said.

Industry analysts said gambles like Yahoo's, while risky amid current regulatory uncertainty, may well receive ultimate approval. "I'm guardedly optimistic," said David Wolf, managing director of Claydon Gescher Associates Ltd, a Beijing-based media and telecommunictions consultancy.

"Many of us know China far too well to say that anything's a sure bet or a shoe-in," Wolf said.

"If China is to develop its information industries at a speed constant with the rest of the world, then it's going to have to allow some form of overseas investment," he said. "I genuinely believe that the leadership of China understands that."

-- The Wall Street Journal