What does an MOU actually mean in China’s financial industry?

Written by Zennon Kapron || 16 Aug 2011

Frequently companies issue press releases talking about a new agreement or MOU with a Chinese financial institution or market player. As Chinese companies globalize and more foreign companies setup offices in China, announcements like these are becoming more common, it is worth taking a minute to reflect on what MOUs or agreements actually mean both inside and outside of China.


Before we get specifically to the topic of MOUs and agreements however, it is worth taking a look at the concept of contracts as a whole in China.

China contracts

Although things are changing, contracts in China, like many other things in China (including traffic laws) are typically used in practice as ‘guidelines’, but not steadfast rules. Stories abound of western companies signing contracts with local companies and then when they next meet, the local company says ‘ok, let’s talk about pricing and how to make this work’ – something that would typically be agreed in the contract and stuck to.

This is not limited to business contracts. Employment contracts in China are currently very pro-employee. Often an employee will officially resign from a company and then come back looking for compensation. Recently a company we worked with had an employee who had covertly setup a service company on his own and was funneling work from his full time employer to his recently setup personal company. The MD found out about this and over the course of three months collected evidence including the actual company registration in the employee’s name. Even though the employee had violated just about every term of his contract, the company still needed to pay out a severance to avoid legal action.

So what works? Typically the most successful business relationships in China are those that are based on trust, not contracts. Trust is built by establishing a long-term relationship between companies AND people. Some of the largest deals done in China are based on trust with a contract almost as an afterthought.

Inside vs. Outside of China

As you could likely deduce, MOUs signed in China are for foreign companies coming in and MOUs outside are for Chinese companies expanding abroad. In general, MOUs signed in China, as mentioned above, do not carry much weight. Although a Chinese bank wouldn’t sign an MOU with just any company, it is not overly selective. Typically there is more significance for those MOUs involving a Chinese company which are signed concerning business outside the country.

A good example of how this works is China UnionPay (CUP). If you search for “MOU China Unionpay” you will see thousands of results for companies that have signed some agreement with CUP. If you were to look at one that was signed recently between MasterCard and CUP, although it covers a number of potential points of international cooperation, it commits to nothing domestically. This is quite common – Chinese companies are typically quite willing to sign agreements on specifics when it concerns potential areas of benefit abroad, in this case CUP basically expanding their acceptance network globally, but very rarely do you see any specifics about any mainland activities that would be valuable for western companies.

HK vs. Mainland

Another aspect of MOU announcements to keep in mind is with which part of the company signed the actual MOU. Nearly all of the larger domestic Chinese banks have Hong Kong branches that operate relatively independently and much more like western organizations. Bank of China (Hong Kong) Limited, Bank of Communications (Hong Kong), etc.. Many companies talk about these deals as “see, we have a Chinese bank as a client.” However, as HK branches of Chinese companies operate largely independently from the mainland branches, one should not assume that because an MOU was signed with the HK office that the mainland entity will also be adopting the same solution or platform – this would very rarely happen.

Conclusion / Disclaimer

Please do not take all of the above as the definitive answer of how business is done in China – these are more aspects of doing business in China that you should be aware of, rather than rules. China is constantly changing and the ways of doing business are no exception. You should always have a staff member or a local partner who has been on the ground in China for a number of years to help you understand and navigate the nuances of the market.

And finally, all this being said, domestic banks tend to be very tight-lipped and any PR/announcements are fairly tightly controlled. Even getting an MOU or agreement signed is a big step and, in the absence of an actual deal to report, is definitely progress.

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