<p>The literature on the profit-shifting activities and strategies of multinational enterprises (MNEs) has focused predominantly on developed economies. The experience of developing countries may differ, however, because they often employ preferential tax regimes which could substantially alter MNEs’ profit-shifting incentives. This paper studies MNEs of China, the largest developing country, and examines an implicit profit-shifting strategy, risk shifting, while explicitly incorporating China’s preferential tax policies into the empirical analysis. As a common practice in transfer pricing planning, MNEs shift profits to lower-tax jurisdictions by reallocating the operating risk embedded in intra-firm transactions. We find that when the tax rate differential between China and a foreign country increases by 10%, the risk remaining in the Chinese parent firms declines by 10% from the mean value. In addition, risk shifting into China is more pronounced than risk shifting out of China, which highlights the important role of preferential tax policies of China. The results are robust to alternative risk proxies including strategic risk and to alternative approaches to risk measurement. In particular, the estimated effects are stronger among firms with higher levels of intangible assets, inventory, or accounts receivable, where R&amp;D risk, market risk, inventory risk, and credit risk are more likely to be salient.</p>