China is often described by foreign companies as an "investment paradise." Indeed, China has low wages, cheap, abundant natural resources, a large market and, more importantly, a primitive taxation system that provides investors with ways to legally reduce their tax burden and even evade taxes completely. This is an extra bonus -- and a fatal attraction -- that has fired up the China investment fever in recent years.
But a string of events has recently turned this investment paradise into a purgatory for both Chinese and foreigner alike. Neither glamor nor membership in the Chinese People's Political Consultative Conference helped film star Liu Xiaoqing (
Earlier this year, Zhu angrily lashed out at tax evasion among the country's tycoons and launched an anti-corruption crackdown. The State Administration of Taxation said recently that foreign corporations have evaded up to US$30 billion in taxes. Tackling corruption is certainly a sound idea, but Beijing's highly selective enforcement has turned its latest anti-corruption drive into just another pit of corruption.
Local governments have long offered tax breaks and incentives to attract investment and businesses have long bribed central-government officials -- not just to get special privileges, but just to get the necessary paperwork done. Bribing tax officials is one thing, using legal loopholes to reduce a company's or person's taxes is another. Few people could have anticipated that "business as usual" might one day land them in jail. It is equally unlikely that foreign businesses attending one of the many investment roadshows held by the Chinese government would consider that tax incentives offered by local governments would suddenly become illegal.
Many political observers believe corruption and tax evasion charges are mere excuses for the arrests of Liu, Zhu and Yang. They believe the real reason is the power struggle within China in the run up to the Communist Party's 16th National Congress next month. Insiders think that President Jiang Zemin (
Yang appears to have been caught in the middle between Pyongyang and Beijing, which was not happy that it wasn't consulted before his appointment. However, Yang's investments in the city of Shenyang are closely linked to Liaoning Province Governor Bo Xilai (
When the political foundations begin to wobble, someone has to be sacrificed. These corruption and tax evasion cases are mere bargaining chips in the leadership's negotiations on their post-congress positions. However, they do highlight the unpredictable risks of investing in China. Those who still think that China is an investment paradise would do well to remember Yang. All his wealth, his Dutch citizenship and his ties to North Korea count for nought in a country without the rule of law.
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