HANGZHOU - As foreign investment floods into China's burgeoning car rental market, the sector is facing a possible reshuffle due to increased competition.

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On Nov 18, Mitsubishi Corporation of Japan signed an agreement to pump in $20 million to set up a joint venture with Zhejiang-based Cheeyo Car Rental.

The deal demonstrates the confidence Mitsubishi Corporation has in China's car rental market.

"China's rental car market is growing fast and has great potential for further expansion," said Naomichi Komuro, chairman and president of MC Capital Asia Ltd. (MCCA), Mitsubishi Corporation's private equity investment arm in Asia.

"The entry of foreign investors will intensify competition and cause a reshuffle in the car rental market," said Komuro.

Cheeyo Car Rental is not the only Chinese company getting a boost from foreign investment.

A consortium led by Goldman Sachs Group Inc invested $70 million in Shanghai-based eHi Car Rental at the end of August.

The company plans to expand its service network within one year to cover about 100 cities in the country and have more than 10,000 cars to rent out.

The result of the increased foreign investment is changing rental car market in China. It is entering a new era, said Zhang Xiaolin, board chairman of Cheeyo Car Rental.

Zhang said some small rental car firms will inevitably be merged or realigned, while the others would be edged out of the market.

Opportunities versus risks

Car renting, scarcely seen a decade ago, is gaining more popularity and prevalence nowadays in China's big cities.

When Beijing traveller Zhang Daping and his family arrived at Xiaoshan airport in Hangzhou, capital of east China's Zhejiang Province, a brand new Buick LaCrosse sedan was there waiting for them.

Zhang booked the car online three days earlier from a local rental car agency.

"We are here on a self drive tour," Zhang told Xinhua. "With this car, it's more convenient for us to travel around than taking buses or taxies."

According to a forecast by Roland Berger Strategy Consultants, 400,000 more rental cars will be needed in China by 2014 to satisfy consumer demand, with potential operation turnover totalling 38 billion yuan ($5.7 billion).

China's car rental business took off in the early 1990s with state-owned firms providing rental services mainly to companies instead of individual users.

Currently, the sector is made up of a mixture of homegrown and foreign players. Foreign rental car giants like Avis and Hertz are doing business in the country.

Homegrown firms are usually small in scale, with 80 percent of them having no more than 50 cars.

Given the increased competition especially that from foreign firms, the smaller players are having to change.

Legend Holdings, parent company of China's leading personal computer maker Lenovo Group, announced on September 15 that it had acquired more than a 50 percent stake in China Auto Rental, the country's leading car rental service provider.

The deal cost Legend Holdings 1.2 billion yuan.

Beijing-based China Auto Rental, founded in 2007, has more than 300 service spots in 41 cities around the country with about 6,000 cars in service.

Yet, China's rental car market is still in its early stages, characterized by low-level management, said Li Daokui, director of the Center for China in the World Economy (CCWE) at Tsinghua University.

Besides, legal loopholes pose risks for the new sector.

"Incompletion of related laws and regulations is deterring the development of the rental car business in China," said Yang Gaobo, a lawyer with Zhejiang-based Zehou Law Firm, citing fraud cases in Beijing and Shanghai in recent years as an example.

"The laws are lagging behind the fast-growing rental car business to provide effective protection," said Yang.