Wealthy mainlanders are increasingly sending their offshore income home via the British Virgin Islands to avoid paying tax in a trend that has entrenched the Caribbean haven as China's second-biggest source of foreign investment, experts say.
Strict corporate secrecy laws in the BVI, the abbreviation by which the British overseas territory is also known, allows mainlanders to send funds from export sales or company listings in Hong Kong or overseas back home disguised as foreign investment, which is untaxed.
'The reason for this strong link between China and the BVI is a very simple form of tax avoidance,' said Steve Dickinson, Qingdao-based head of American law firm Harris & Moure's China practice.
This inflow of fake foreign investment has emerged as a serious loss of revenue for mainland tax collectors and a threat to economic stability as the authorities seek to curb an influx of so called hot money headed for speculative ventures.
China's economic planners need to be able to distinguish between Chinese money and genuine foreign investment, says Geng Xiao, director of Columbia University's Beijing-based Global Centre for East Asia, who has studied the round-tripping of Chinese capital.
BVI companies last year accounted for about US$10.5 billion of new foreign direct investment into China, or 10 per cent of the total, according to official mainland figures.
This was more than foreign investment from the US, Britain, France and Canada combined.