China’s $3.7 Trillion Trust Industry Shaken by AVIC Trust Custodianship: Insights for Family Office Practitioners

Understanding the AVIC Trust Incident in Broader Context

AVIC Trust’s custodianship highlights ongoing systemic pressures within China’s trust sector, a core component of the “shadow banking” system. Similar liquidity and default issues have affected institutions like Zhongrong Trust (中融信托) and Minsheng Trust (民生信托), underscoring broader industry vulnerabilities and prompting investors to reassess risk management strategies.

In response, regulatory bodies such as the China Banking and Insurance Regulatory Commission (CBIRC) have introduced measures like the “Measures for the Administration of Trust Companies (Draft for Comments).” These guidelines aim to enhance capital adequacy requirements and implement stringent risk management and transparency standards, reinforcing operational resilience and investor confidence.

Family Trusts: Accelerating Adoption Amid Market Volatility

Despite industry turbulence, the adoption of family trusts (家族信托) by China’s ultra-high-net-worth individuals (UHNWs) continues to rise. Approximately 25% of China’s affluent—those with investable assets exceeding RMB 50 million—utilize family trusts for asset protection, risk mitigation, and structured succession planning.

This trend reflects a shift from wealth accumulation to preservation. Many mainland Chinese entrepreneurs, primarily first-generation wealth creators, face complex succession scenarios due to rapid wealth accumulation and the historical one-child policy. Structured trust solutions have thus become essential in mitigating succession risks effectively.

Contrasting Succession Strategies: Mainland China vs. Hong Kong

Succession planning in mainland China differs significantly from that in Hong Kong. Hong Kong families often have multi-generational structures and benefit from an established common-law trust framework, facilitating smoother intergenerational wealth transfers. Many Hong Kong family businesses, established in the 1970s and 1980s, are now transitioning to third or fourth generations, with well-defined governance structures and succession plans.

In contrast, mainland Chinese families are navigating succession planning for the first time. The prevalence of first-generation entrepreneurs, combined with smaller family units due to the one-child policy, presents unique challenges. Additionally, complex family dynamics, including non-traditional relationships, necessitate discreet and customized trust solutions to ensure equitable wealth distribution and asset protection.

Navigating Regulatory Differences: Strategic Implications for Estate Planning

Advisors must understand the distinctions between PRC Trust Law and common law trusts in jurisdictions like Hong Kong, the Cayman Islands, and Jersey. PRC trusts often do not fully transfer legal ownership of assets, potentially exposing them to creditor claims. Consequently, affluent families frequently adopt a dual-track strategy—utilizing domestic trusts for onshore assets and offshore trusts for international holdings—to navigate China’s regulatory framework effectively.

China’s strict currency controls further complicate estate planning, prompting many to explore offshore trust solutions. This demand has led to a proliferation of Chinese-owned Trust or Company Service Providers (TCSPs) in offshore jurisdictions. While these entities cater to the growing need for international asset protection, they also raise concerns about service quality and regulatory oversight.

Strategic Considerations for Family Offices and Wealth Advisors

Drawing from practical experience, advisors should consider the following:

• Robust Trustee Due Diligence: Evaluate trustees for financial stability, regulatory compliance, and crisis management capabilities to safeguard trust assets.
• Strategic Diversification: Diversify trust structures across jurisdictions and institutions to mitigate systemic and institutional risks.
• Customized Trust Solutions: Tailor trust arrangements to reflect individual family dynamics, ensuring alignment with unique succession goals and protective requirements.

Outlook: Towards a Mature and Resilient Trust Industry

Despite challenges exemplified by the AVIC Trust custodianship, China’s trust industry is progressing towards increased maturity and stability. Enhanced regulatory oversight and growing sophistication among Chinese entrepreneurs indicate a solidified future role for trust-based estate planning solutions.

As wealth transitions from creation to preservation, structured and well-administered trusts will become increasingly integral. Family offices and wealth management practitioners must remain vigilant, adaptable, and thoroughly informed to guide clients effectively through generational transitions.

Harry Yu is the Honorary Director at The Chinese University of Hong Kong’s Center for Family Business (CFB), where he contributes to research and education in family governance and intergenerational succession. His published case studies on prominent Hong Kong multigenerational families are incorporated into CUHK’s curriculum, supporting the professional development of the family office sector. Based in Shanghai for over two decades, Harry has extensive experience collaborating with family offices in China, helping them navigate the complexities of global expansion and cross-border wealth planning. He leads the private client services at Fung Yu Trust, specializing in trust structuring and family office solutions for ultra-high-net-worth families. Fung Yu & Co., founded by his father, is a family-operated firm celebrating its 60th anniversary. As one of Hong Kong’s longest-established firms in financial management, tax, and fiduciary services, Fung Yu & Co. serves clients through offices in Hong Kong, mainland China, and Europe. With its deep roots in Hong Kong and Harry’s extensive connections in China, the firm provides clients with a uniquely integrated perspective across both markets.