This paper aims to provide empirical evidence on the extent and possible channels of tax competition among provincial governments in China. Using a panel of provincial‐level data for 1993–2007, we find strong evidence of strategic tax interaction among provincial governments. Tax policy is approximated by average effective tax rates on foreign investment, taking into account the tax incentives available to foreign investors. In line with the predictions of the theoretical tax competition literature, we also highlight the impact of each province's characteristics (including its size and level of industrialization) on the strategic interaction with its neighbors. Finally, the paper explicitly identifies the establishment of development zones as an important conduit for tax competition among provinces.