This paper is based on findings from a two‐year MPhil research project that aimed to examine the development of hotel chains in China since 1978 and to recommend policy and operational guidelines for their further expansion. The study confirmed the unique nature of the hotel industry in China, existing as it does in a country moving from a centrally planned economic system that is strongly influenced by communist dogma towards a Western‐style market economy. This paper identifies and discusses four main categories of barriers to chain development, namely: economic and political systems; hotel ownership; hotel management capability and resources; and competition between local and foreign firms. Massive growth in China’s hotel industry is forecast, and this presents a great attraction for hotel companies. However, the need to understand and appreciate these barriers is recommended to any company, local or foreign, contemplating doing business in this unusual but potentially very large market place.

Franchising develops quickly in the hotel industry with the expansion and globalization of hotel chains, as it brings about advantages and sets up a very good leverage between two parties – franchisor and franchisee. Major multinational hotel corporations have entered China, but franchising is seldom used as a tool of expansion there. The continuous increase in tourism and the structural change in the hotel industry in China afford more opportunities for the growth of franchising operations and also of indigenous hotel chains. When franchising in this specific market, quality control, ownership, connection, business tradition and franchisor‐franchisee relationships should be examined carefully in order to ensure success. A full understanding of China’s peculiar social, cultural, economic and political context is essential for foreign companies, whilst existing and new indigenous companies require greater technical and operating expertise along with the necessary business acumen to operate hotel chains.