Technically speaking, there is in fact a 5-year rule on the books, i.e., a regulation that requires foreign teachers to leave China after five continuous years of employment.
We address this regulation, as well as the general role of law in China, in an article I strongly recommend that you take a careful look at: SAFEA, Foreign Teachers, and Chinese Boxes
. Basically, all such rules in China are only irregularly enforced and when they are enforced, they are being used to give face to foreign employees who are otherwise no longer wanted, i.e., as a rationalization.
My advice is for you to speak directly and honestly with your current FAO or school owner (whichever applies). Simply say that you’ve heard about such a rule and you were wondering if it is in effect in your province or city. If the Chinese official replies that he or she has never heard of such a rule, then you shouldn’t worry about it.
The bottom-line is this: if your school officials have any guanxi (clout) at all with the local government and they want to retain you, then it truly doesn’t matter whether the rule is in effect or not. Conversely, if they don’t want to retain you, they may call into effect this or any other “rule” they can think of to justify the termination.