Thin capitalization is a common means of tax avoidance for multinational corporations. China’s thin capitalization rule was established in 2008. However，there is few research on the effect of China’s thin capitalization rule on foreign-funded enterprises at present. Based on data from Chinese manufacturing enterprises database in 2004 -2011，this paper uses difference in difference model to test the impact of the thin capitalization rule on the tax avoidance behavior through thin capitalization of foreign-funded enterprises empirically. The results show that China’s thin capitalization rule has effectively reduced the degree of thin capitalization of some foreign-funded enterprises，especially those whose debt-equity ratio is higher than 2，and inhibited the tax avoidance through thin capitalization of foreign-funded enterprises. Due to the strong tax avoidance motive， the actual tax burden of foreign-funded enterprises is far lower than the statutory tax rate. Though the thin capitalization rule has effectively improved the actual tax burden of foreign-funded enterprises，the tax burden of foreign-funded enterprises with high degree of thin capitalization is still less than that of foreign-funded enterprises with low degree of thin capitalization. At the same time，the thin capitalization rule has a learning effect on foreign-funded enterprises that fail to meet the regulatory requirements: foreign-funded enterprises whose debt-equity ratio does not exceed the statutory standards will increase their degree of thin capitalization.