Direct selling was banned by Beijing in 1998 due to widespread fraud but it is expected to be permitted again once Beijing issues the rules, expected by May.

An industry analyst said a draft of the country's first direct selling law had been submitted to the State Council's Legal Affairs Office for review.

The analyst said the proposed maximum commission of 25 percent is far less than the 40-50 percent which the World Federation of Direct Selling Associations and some foreign direct selling companies have been lobbying the central government to accept.

He believed the commission was set low because the government wanted direct selling companies to use single-layered commissions instead of multi-layered commissions.

``With such low commission rates, direct selling companies will find it difficult to adopt multi-level marketing using a pyramid-shaped organisational structure of sales agents,'' he said.

``Such person-to-person sales network is something that the government is nervous and cannot control.''

Some industry players believe commissions should be set by the companies without government interference.

``The compensation to distributors should be decided by market dynamics rather than prescribed by the government,'' said Angela Keung, president of the Direct Selling Association of Hong Kong.

Corey Lindley, executive vice-president of Nu Skin Enterprises, said the company will add 80 to 100 new stores in 60 to 70 mainland cities this year to comply with the proposed regulations.

Currently, Nu Skin Enterprises has 120 stores in China employing 7,000 people, including 5,000 sales representatives.

Its China revenue reached US$105 million (HK$819 million) last year - up 176 percent from US$38 million in 2003.

olivia.chung@singtaonewscorp.com