how china operates #1

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    This is for education purposes for those who might be interested in investing in China.

    Monday, November 25, 2002

    Mainland tax-dodgers use Hong Kong to play FDI game


    Prev. Story


    The clandestine recycling of funds between the mainland and Hong Kong by tax-dodging companies is one of the biggest open secrets of the financial world.
    The movement involving billions of dollars is estimated by the World Bank and United Nations to artificially boost the levels of foreign investment into China by between 30 and 50 per cent - suggesting that figures often touted to lure more overseas investors into the world's most populous market are rubbery at best.

    The phenomenon is part of a process known as "round tripping", which involves mainland companies opening subsidiaries offshore to pose as foreign investors. And the Hong Kong government does not intend to do anything about it.

    The SAR's own investment figures benefit from the flows, as do lawyers, accountants and corporate services companies that assist Chinese companies to operate their affiliates.

    While China's foreign investment flows are undoubtedly large, overstating them could cause economic and diplomatic problems, Bob Broadfoot, of the Political and Economic Risk Consultancy, said.

    "By overstating the actual amount, it might be complicating its relations with other Asian countries that feel threatened by China's ability to attract [foreign direct investment]," he said.

    "The Chinese government might also feel overly secure in its appeal to foreign companies."

    However, round tripping was mostly not illegal and should be viewed as part of the normal flow of international funds, according to Ernst and Young executive partner Alfred Shum Yuk-man.

    The proliferation of Chinese companies in Hong Kong, through which funds often flowed, arose from government-linked corporations on the mainland opening offices to conduct trade with the SAR and the world, he said.

    From the South China Morning Post
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