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Understanding China's New Franchise Regulations

By Erik B. Wulff
May 31, 2007

The new franchise regulations recently issued by China's State Council became effective on May 1, 2007. Shortly after their promulgation, MOFCOM, the ministry that has authority to interpret and implement the regulations, issued two implementation guidelines, namely the Administration Rules on Commercial Franchise Filing and the Administration Rules on Commercial Franchise Information Disclosure. The regulations are intended not only to provide presale disclosure to prospective franchisees, but also to restrict use of franchising to legitimate business operators. Moreover, the regulations seek to gather statistical data on the scope of franchise activities in China through a franchise registration process.

These regulations reflect a more permanent regime of regulating franchising in China, and they were preceded by the rather controversial 'Franchise Measures' promulgated by MOFCOM effective Feb. 1, 2005. A particular concern for foreign franchisors with the prior franchise measures was a requirement to have two company-owned units operating in China for one year before becoming able to obtain government approval to franchise (the so-called 'two plus one' requirement), and this requirement was said to apply even to companies that had existing franchising systems in China. This was the government's effort to weed out disreputable operators, but it also caused concerns for legitimate businesses. The new franchise regulations take a less restrictive approach to franchising in China, but still leave much to be desired.

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