Franchising in China

Economy

China has taken over from Japan to become the 2nd largest economy in the world and is rapidly growing. In 2009 China also took over from Germany as the largest exporter in the world. China's economy grew by ten (10) percent in 2010 with the retail sector experiencing an 18.5% increase on the previous year’s figures.

Legislation

There are a number of key pieces of legislation which impact upon and regulate franchising including; the Administration of Commercial Franchise Procedures (effective as of 1 February 2005); Administration of Commercial Franchise Operations Regulations (effective as of 1 May 2007); Administration of Commercial Franchise Operations Registration Procedures (effective as of 1 May 2007); Administration of Information Disclosure for Commercial Franchise Operations Procedures (effective as of 1 May 2007) and the Administration of Foreign Investment in Commercial Sector Procedures (effective as of 1 June 2004).

Franchise Market

There are currently over 4,000 franchise systems in China. The rapidly growing Chinese economy and the future predictions for constant and high levels of growth nonetheless, presents opportunities for future growth in the franchise market.

The three sectors which dominate the Chinese franchise market are retail, catering and service based concepts with figures of forty four (44) percent, thirty (30) percent and twenty six (26) percent respectively.

Franchise Legislation

• Prior to offering a franchise a franchisor must satisfy the "2+1" rule (the franchisor must already have at least two (2) existing stores anywhere in the world and must have been engaged in the franchise business for more than one (1) year).
• The franchisor must register with the Ministry of Commerce (MOFCOM - for overseas based franchisors).
• The franchisor must disclose in writing certain mandatory information at least thirty (30) days before the parties execute the franchise agreement.
• Local contract law provisions will apply to the franchise agreement and regulate the validity and formation of the agreement.
• A number of other mandatory local law provisions govern the franchisor: franchisee relationship including advertisement law, trade mark law and some regulatory requirements, such as the Regulations on the Prohibition of Pyramid Selling.

Conclusion

There are stringent regulations governing franchising law and agreements, in light of this, prospective franchisors considering entering the Chinese franchise market should seek specialist legal advice to ensure effective compliance, and enforceability of their agreements.