China's state-owned investment group Citic, and US private equity firm Carlyle Group, will take control of the operations in a deal valued at $2.1bn (£1.7bn).
McDonald's owns and operates about 65% of its 2,000 China outlets.
Franchising allows it to take a slice of sales while cutting operating costs.
McDonald's is trying to streamline its global operations, and changing its ownership structure to revolve more around franchises is a major part of that revamp.
In March last year, the firm said it was seeking partners to help it add more than 1,500 restaurants in China, Hong Kong and Korea over the next five years.
Under the agreement signed Monday, the US fast food giant will keep a 20% stake in its China business. Citic will hold a 52% share in the partnership while Caryle takes 28% of the new business.
Competitor Yum Brands, the owner of KFC and Pizza Hut, is also restructuring its China business.
Both McDonald's and Yum Brands have been facing increasing competition from cheaper local rivals, particularly in China, where they are trying to recover from food safety scares.