how china operates #2

  1. 6,931 Posts.
    Sorry about the double post. Also from the South China Morning Post.



    Monday, November 25, 2002

    How the SAR is used to recycle funds
    Clandestine money is funnelled through Hong Kong, say experts, by companies which are controlled by mainlanders


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    The SAR government is refusing to take action against the recycling of mainland funds through Hong Kong, much of which experts say is involved with tax evasion but disguised as foreign investment.
    The World Bank has estimated that almost half of the foreign direct investment (FDI) attracted by China may originate from mainland companies.

    Some of it is clandestine but some also involves legitimate practices seeking to take advantage of loopholes in China's tax, foreign exchange and investment laws - known as "round tripping".

    A large proportion of the clandestine movement of money is funnelled through companies in Hong Kong which are controlled by mainlanders, experts say.

    The World Bank's calculation that half of the foreign investment directed to the mainland - made in March in the Washington-based lender's most recent yearly report on developing countries' external finance - outstrips other estimates by a considerable margin.

    The United Nations Conference on Trade and Development said last month that about 30 per cent of the US$47 billion (HK$367 billion) in foreign investment earned by China last year came from "reinvested earnings from foreign affiliates", which appears to be "round tripping".

    The South China Morning Post last Monday reported that a private study by the Singapore government suggested the recycling of China funds may be much higher than a quarter of the total.

    The estimates suggest the mainland government may be defrauded of billions of yuan every year. Analysts believe the phenomenon arises from corporate tax evasion by using offshore havens such as Hong Kong or the British Virgin Islands where affiliate or subsidiary companies are established. Foreign invested companies on the mainland enjoy a tax-free holiday for two years after their first profitable year, then a 50 per cent discount on taxes for a further three years.

    Experts said the circular flow of funds might drop after the mainland equalises the rates of tax for local companies (33 per cent) and foreign companies operating in special zones (15 per cent).

    The process leads to foreign direct investment flows - often used as an indicator of the level of overseas investor confidence - being massively overstated.

    An Economic Services Bureau spokesman failed to respond to questions about the SAR's role in "round tripping".

    A government source said: "[Round tripping] is considered as an integral part of the FDI framework, they are thus entirely legitimate activities. The substantial flow of international funds in and out of Hong Kong are entirely in line with our role as an international financial centre."

    The World Bank report said: "Some early studies estimated that round-tripping accounted for nearly a quarter of foreign inflows to China in 1992.

    "The extent of recycling may have increased in recent years," the study added, citing figures showing in 2000 Hong Kong accounted for 38 per cent of China's FDI, while the Virgin Islands was responsible for nine per cent.

    "[Tax] preferences for foreign capital are believed to have encouraged Chinese investors to move money offshore and then bring it back to China disguised as foreign investment.

    "Another motivation for 'round-tripping', or 'recycling', is the concern that the government may impose exchange restrictions on residents, as occurred in July 1993," the study said.

    Of the US$47 billion China declared as FDI last year, more than US$20 billion was routed through Hong Kong or the Virgin Islands.

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