So far, most international trustees have to admit that the promotion of offshore trusts in the Chinese market is far from the optimistic expectations they held five years ago, but it is also not as pessimistic as what those who have retreated describe. Like other businesses which entered China for a share of the local market, a very high threshold stands in the way of such a large market, especially for offshore trusts. Due to the significant gap between local trusts and offshore trusts, promoting offshore trusts in China is like selling shoes in a country where people don't wear shoes. It is exciting but desperate, but when you feel hopeless, a sparkle makes you fall into reverie.
No Stars
The number of speeches I've made in 2015 regarding offshore trusts is almost larger than the total number of speeches I have ever made before. I have exchanged ideas with so many peers on and off stage. No one in the commercial circle will give you precise data on their transactions, but relying on years of experience in practical situations, I'm sure that no major trust companies have achieved a lot in China. I can't speak of the precise data, but I can make an analogy with shoe selling again. You sell shoes in a country where people don't wear shoes. You notice that people walk contentedly with no shoes, and may hurt their feet sometimes, but they just don't buy your shoes. However, some people who hurt their feet come to you and ask "if I wear your shoes, will my injured feet be immediately recovered?" Of course, the answer is negative, so they continue to walk with bare feet.
Due to the characteristics of family trusts, that is, high confidentiality and customization, the relationship between trustor and trustee must be very close. Unlike with other products, therefore, it is hard to create a dominant position in such an industry because it requires a long time to build a relationship. Therefore, if you have not achieved much as a trustee, don't worry and don't give up. Your job is continuing to persuade the people wearing no shoes. Patience is a valued quality.
Prepare for a War with No Enemy
Several large trust companies haven’t managed to get started, let alone the medium-sized ones. Offshore trusts seem to be less popular than Fengshui masters. The stories of being deceived by Fengshui masters are repeatedly quoted by offshore trust masters. They suggest that people keep away from Fengshui masters, but to accept offshore trusts. However, it seems that Chinese people still prefer the romantic sense of Fengshui to trusts which don't conform to Chinese-style logic (for example, the case of Gong Ruxin in Hong Kong). While offshore trusts suffer a setback, some local wealth management institutions in China seem to thrive. Although no significant results have been achieved, it cannot be denied that they have brought new possibilities to the market as path-breakers.
The China Will Registration Center in Beijing stores the wills of the old for free. This institution can expect booming business when these old people die. Of course, it is a platform for public benefits. Its commercial value is yet to be explored. The wealth management association that originated from Shenzhen has established branches all over China. As a member of the association, I think it seems to be pro forma. The oath-taking rally is grandiloquent, but we didn't know where the enemies were. Today, as the power of the crowd economy is magnified by several times and all kinds of banker clubs exist everywhere, the question is still the same: where are the clients?
An Innovative Choice of Opportunism
Since many Chinese clients like to ask embarrassing questions about matters like how much they need to invest and whether the profits are guaranteed, some customized offshore product packages with a starting amount of 1 million US dollars and an annual return of above 10% preferred by Chinese people have been launched to satisfy market demand. The results can well be imagined. The coupling arising from misunderstanding will surely lead to the break up when it is better understood. The offshore trust pursues privacy, inheritance and preservation rather than risky increase in value. Such innovation is surely not welcomed by clients or recognized by the market. I have not discovered any popular trend of such trust company products.
Pressure is the Key
It cannot be denied that, besides the natural skepticism of Asian people against the transfer of "entrusting the assets to the trustee", insufficient external pressure is also one of the reasons that offshore trusts are developing prosperously in the Chinese market. One important piece of evidence is that, currently, many high net-worth individuals use family trusts to avoid the high tax in the US (of course, inappropriate planning may make the bad worse rather than providing timely help) rather than avoiding domestic problems. The pressure in China mainly comes from the implementation of inheritance tax and gift tax. If both taxes are implemented, the originally blurry pressure will become distinct and the familiar planning tools won’t work anymore. Even if you want to prevent crises before they emerge, the rational conduct is to carry on planning five years in advance. However, few people have such foresight.
The Actions of Chinese Trusts
Today, although financial trust products are not popular, both local private banks and trust companies in China manage to find high net-worth individuals’ metaphorical “large cakes”. It is impossible to make offshore trusts a trustee of any domestic cash assets, so carefully dealing with Chinese trust law becomes the key point of the research and development of domestic trust companies. Up until 2015, several trust companies conformed with the times and launched innovative trust service products which didn't have profit as the main objective (such as overseas study trusts, alimony trusts, and marriage and family security trusts) while some radical Chinese lawyers even claim that Chinese family trusts have a protector system and Chinese clients therefore don't need offshore trusts. It is obvious that, while offshore trusts provide local trusts in China with an idea for reform, they also quietly compete with local trusts in the family wealth management market.
A Foundation for Reshaping Relationships
The last few years witnessed the tortuous development of offshore trusts in China. Still, they have not gained a firm foothold. Most of the methods in the past don't work, because they are either short-sighted or negative and cannot be used to establish a long-term partnership with high net-worth families. Once upon a time, many people thought corrupt officers and upstarts would become the main clients. The fundamental mistake in such thinking is that those who grow up in the jungle only believe in the law of the jungle and reject the rule of civilization, and only entrepreneurs who have undergone all sorts of hardships and deprivation adopt the law of civilization. However, most marketing strategies adopted by trustees and their representatives are too negative and speculative. For example, some claim that all guaranteed income from investments is typical speculation because entrepreneurs are good at profit making, while trusts are for safeguarding one's heritage.
Indeed, tax avoidance is important, but avoiding tax by concealing things will not last for long. Clients will never reach a long-lasting consensus with a service provider if they stay on the dark side, just like two bad guys in a movie can never sincerely cooperate with each other. In fact, on the level of wealth management, the trustees and clients may make concerted efforts in many positive fields, like charity, leadership, spiritual inheritance, and optimization of foreign investment. Besides, only by establishing legal and honest partnerships can the sustained development be achieved. Maybe, this is exactly the starting point to remedy the tortuous development of offshore trusts in China.
Michael Liu
Managing Director CIL Group Ltd.
Member of STEP
