A Ministry of Commerce official said on Friday China's infant franchising industry is set to enter a rapid but orderly development stage after a new industrial regulation takes effect next month.

An official from the Department of Commercial Reform and Development with the Ministry of Commerce said China currently has 1,900 franchise systems, with 82,000 outlets.

Though China has the most franchise systems in the world, the scale of their operations is relatively small, the official said. Each system in China has an average of 43 outlets, compared to more than 540 in the United States.

The new franchise management rule, announced by the ministry on December 30 last year and which takes effect on February 1, will stimulate business in terms of its scale and standardization, the official said.

The official said the new rule should invite additional foreign franchisers into doing the local business.

The regulation for franchises, to replace the 1997 measures concerning administration of commercial franchising, defines more clearly the way foreign brands operate franchise businesses in China.

Many of these international brands such as 7-Eleven, MacDonald's, KFC and Pierre Cardin, normally do business through franchising.

But in China foreign franchising was still a grey area before the new rule was published.

A lack of specific provisions in the 1997 version governing foreign direct franchising has allowed relatively few major international companies to have significant franchise businesses in China.

The official said in the new regulation, foreign-invested enterprises must submit an application to the Ministry of Commerce for approval.

No prior approval is required for domestic enterprises engaging in franchising before they register at the administrative offices of industry and commerce.

Foreign franchisers need to submit their sample franchise agreements and operating brochures to the ministry. The ministry will give its response on applications in 30 days.

The official believes the new rule, which offers more detailed provisions, will help build a sound legal environment.

In the poor legal environment, some franchisers conduct substandard businesses or even defraud franchisees of money while franchisees also delay payments to the franchisers or infringe on their intellectual property rights.

Li Xihua, a professor from the China Commercial Study Center, said that franchising began to receive the same attention as direct foreign investment at the government policy level.

Because franchising typically does not involve investing in equities, the Chinese Government used to put less focus on such business.

But the government came to find that franchises are a good business model for China, to help solve its job problems and its scattered private capital, Li said.

China's capital markets are underdeveloped and franchising allows the assembly and concentration of capital from a wide capital base through investment in franchises, he added.

Franchising makes up for the commercial inexperience of the Chinese franchisers by linking their investments to complete training within a well-tested operating system, Li said.

China has a great number of qualified potential Chinese franchisees with strong sources of funding, Li said.

(China Daily January 8, 2005)