The paper investigates the relationship between the domestic capital flight (CF), foreign direct investment (FDI) and the favorable taxation policy in China. Quantitative analysis shows that capital flight of China is important component of FDI in recent one or two years. The research indicates that above 50% FDI comes from CF in the last few years. Domestic CF is changed into FDI and then returns to China, which results from too much favorable taxation policy which Chinese Government gives FDI. The government who wants to control the CF should make a fair domestic market policy in which everyone has the equal rights and is treated at the same status and superior national treatment to foreign capital should be wiped out.