A growing economy, strong interest in the Internet, and a billion citizens make for a ripening market. Consequently, American companies such as America Online, Dow Jones, Intel, and Goldman Sachs are taking equity stakes in Chinese Internet startups.

That's why China's Information Industries minister Wu Ji-chuan caught people by surprise with his announcement last week that foreign investment in homegrown Internet companies is strictly off-limits.

Mr. Wu apparently interprets Internet firms, such as operators of portal and content sites, as extensions of the country's telecommunications network, which foreigners are prohibited from owning. In a land famous for volatile politics, bureaucratic infighting, and enigmatic double-talk, Mr. Wu's comments threw yet another wrench into a promising, yet problematic, emerging market.

A "TROUBLING" SITUATIONMichael Brownrigg, a vice president at San Francisco-based private equity firm Chinavest, described the official's comments as "troubling" and a "reminder that regulators can be arbitrary." He says, "That's a risk factor you've got to take into consideration."

However, Mr. Brownrigg's outlook for China remains rosy. "The fact is a lot of Chinese officials get it," he says. "Unfortunately, a lot of Chinese officials don't get it."

China's murky political stance on foreign investment may yet crystallize into a 21st-century version of perestroika. After all, foreign investment, especially from Americans, remains a crucial source of funding for young, cash-starved Chinese entrepreneurs looking to kick-start companies. At the moment, the flow of that money shows no signs of slowing. Late last week, for example, Intel took an equity stake in Sohu.com, a China-based electronic commerce site. In making its announcement, Intel apparently brushed aside Mr. Wu's comments, made just a few days earlier.

"It's our understanding there's been no policy change," an Intel spokesman says of the situation. China remains an inviting market for the semiconductor maker, he insists, adding, "We see significant growth opportunities in China."

Intel has invested aggressively in Asian high-tech companies, including Shenzhen Prosperity, a Chinese computer-services firm, and India-based Rediff on the Net. Intel typically invests $3 million to $5 million per startup with a goal of driving Internet usage, and by extension, PC sales, according to Intel. The company wouldn't disclose the size of its Sohu.com investment.

HIDDEN MOTIVESSpeculation abounds over a motive behind Mr. Wu's comments, including his personal and political ambitions, a lack of understanding concerning infrastructure and content, and Machiavellian maneuvering by a government looking for bargaining chips with the World Trade Organization (WTO).

Earlier this year, Beijing indicated it would open China's telecommunications companies to foreign ownership in hopes of joining the WTO. However, the United States criticized China for not opening up its markets further. China ended talks with the U.S. after NATO forces bombed its embassy in Belgrade.

Meanwhile, back in the U.S., Lip-Bu Tan, chairman of the Walden International Investment Group, says he's received few inquiries from worried China investors. Walden has so far invested about $100 million in Chinese companies and continues to tout the country's opportunities. "I'm very bullish about the Internet market in Asia for the next ten years," Mr. Tan says.

Dan Malven, principal at New York-based Flatiron Partners, advises clients to invest with firms experienced in China's quirky ways. "We're being cautious," Mr. Malven says of the current situation. Earlier this year, Flatiron joined Walden International, Goldman Sachs, Chase Capital, Singapore's Economic Development Board, and Crystal Internet Venture Funds in investing a total of $25 million in Sina.com, a Yahoo competitor and Chinese portal company with operations in both the U.S. and China. "If our business didn't have the China component," Mr. Malven says, "we probably would have put in more money and been more aggressive."

George Koo, a Deloitte & Touche deputy director and longtime advisor to companies doing business in China, says most outsiders don't realize how much the Internet has taken hold in China. He cites a Chinese woman he met recently who uses the Internet to make telephone calls to relatives overseas, and a Chinese government official who regularly communicates via videoconferencing with a family member in the U.S. "You can't stop the growth of the Internet," he says.

American investors apparently agree.