A document released by the State Council, China's cabinet, featured guidelines on the registration and operation of ODM companies. It says details for each city will be decided by local governments but tells them to "encourage, support and guide" the industry.
The ride-hailing sector has been an arena of intense competition between Uber, Didi and a raft of smaller rivals.
The rules forbid companies from operating below cost, ruling out battles similar to last year's between Uber and Didi. Drivers for ride-hailing apps can't have a criminal record, will have to have three years of experience as a professional driver, and be licensed by a local taxi regulator, according to The New York Times.
The move marks the legalization of on-demand private vehicle taxi services.
On Thursday, Uber and Didi Chuxing said they welcomed the rules and the official endorsement of the industry. "We believe the rules will usher in a new stage of growth for China's online ride-booking system".
China's latest decision allows an American internet company to potentially permeate Chinese society and culture; something the government rarely authorizes.
Uber, headquartered in San Francisco, operates in more than 60 Chinese cities and plans to increase to more than 100 by the end of 2016.
"This is a welcome step ... and we look forward to working with policymakers around the country to put these regulations into practice".
Previously, firms like China's Didi Chuxing and its US counterpart Uber had operated in a gray area in China, as there is a law against drivers of private cars carrying passengers for profit. It facilitates more than 11 million rides per day or 1.43 billion in 2015. Didi raised $7.3 billion in its latest round of funding in June and Uber received almost $2 billion from Chinese backers in January. Other investors included China Life Insurance Co.
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