Illegal and legal business practices facilitate the 'round tripping' of capital which has inflated China's foreign investment levels.
The practices are many and varied but all are designed to reduce the amount of tax paid by mainland companies as well as keeping funds offshore for safekeeping away from corrupt and unpredictable officials.
One of the criminal practices is the under-invoicing of exports or over-invoicing of imports to reduce tax, according to experts.
It involves a Chinese company with a foreign-based partner exporting products to trusted associates overseas with invoices underestimating the goods' values, said consultant Bob Broadfoot. The offshore clients then pay the fake lower price directly to the mainland company and deposit the remaining amount into an offshore bank account associated with part of the company which is supposed to be a foreign investment partner, but is merely a shell company.
It is then returned to China as payments or investments from an overseas partner which are subject to lower tax rates than local companies.
That illegal method has been commonly used by Chinese firms over the past decade to hide foreign currency, said Yeo Han Sia, an economist at the Ministry of Trade and Industry in Singapore.
