China’s Hainan island takes steps towards goal of becoming a leading free trade port

BEIJING - China’s southern island of Hainan, better known for its sandy beaches and duty-free shopping, is taking its first steps towards an ambitious goal of becoming a “globally influential” free trade port by 2050.

Hainan, a province, completed a milestone by launching fully independent Customs operations islandwide on Dec 18. This allows 74 per cent of goods going into Hainan to be tariff-free, up from 21 per cent previously, lowering costs for firms doing business there.

The idea is for Hainan to trade freely with the rest of the world, with tariff-free goods being circulated freely within the island, while imported goods going from the island to the rest of the country will be taxed as usual.

Hainan is already the world’s largest free trade port in terms of geographical area, at 35,400 sq km.

But it aims to eventually rival Hong Kong and Singapore as a globally influential free trade port, focusing on duty-free shopping, offshore finance, high-tech industries, modern services and tourism.

This is in line with the

announcement by President Xi Jinping in 2018

to turn Hainan into a “free trade port with Chinese characteristics”, as a sign of China’s commitment to further opening up.

This new boost to Hainan’s relatively underdeveloped economy has come as it trailed the national gross domestic product average from the 1990s to 2010s despite being China’s largest and only provincial special economic zone, with special privileges, since 1988.

Beyond trade, the island of 10 million people also hopes to boost its industrialisation and services sector. For instance, the Hainan government wants more investment in the medical and education sectors, as well as in financial and professional services.

Despite its tax and policy incentives, sufficient land size, sizeable marine and agricultural resources, as well as high-level political backing, Hainan faces a long road ahead to realise its ambitions as a potential rival to the likes of Singapore and Hong Kong, analysts say.

A key policy, put in place in 2021, is an import tariff waiver given to goods sold from Hainan to the rest of mainland China if they gain over 30 per cent added value in Hainan. This is to encourage foreign manufacturers – including those in the biopharmaceutical, high-end equipment and electronics industries – to use Hainan as a gateway to the Chinese market by doing the final processing of their products on the island.

Although there are policies encouraging value-added activities in other special economic zones, Hainan’s “30 per cent value-added” policy is specific to the free trade port.

In addition, since 2020, the corporate income tax rate for firms in selected industries has been capped at 15 per cent – the lowest level in China. Personal income tax is capped at a competitive level of 15 per cent for qualified talent.

Professor Sang Baichuan, dean of the Institute of International Economy think-tank in Beijing, told Chinese financial media outlet Yicai that with the increase in the number of goods that can be imported with zero tariffs, businesses can make use of low-cost imported goods for processing and manufacturing and increase profits.

“Thus, we hope that Hainan will become a headquarters base for multinational corporations entering the Chinese market, and also a headquarters base for Chinese enterprises entering the international market,” he said in an interview published on Dec 18.

As a sign that Hainan will mark the next stage of China’s liberalisation, the symbolic date of Dec 18 was chosen for the latest move, as that day in 1978 was when the Communist Party of China held a top-level meeting that put China on the path of decades-long rapid economic growth through reforms and opening up of the economy to foreign trade and investments.

Dr Chen Bo, a senior research fellow at the East Asian Institute in Singapore, said that Hainan’s challenges range from

tariffs from the United States

to a lack of skilled labour.

Goods from Hainan will face the same US treatment as those from anywhere else on the Chinese mainland, meaning that tariff barriers will still apply, Dr Chen, who researches China’s economy, told The Straits Times.

Even though Hainan has been a special economic zone since 1988, it still lacks high-quality workers in both manufacturing and services, he said.

The proportion of residents with higher education is lower than that in other provinces. According to China’s 2020 census, the proportion in Hainan was around 10 per cent, below the national average of 15 per cent.

“For sure, Hainan does have great potential and strong policy support, but in the short term, a more realistic goal is being a first-class regional open economy in China. Competing with Singapore or Hong Kong could be its long-term goal,” he said.

Nanyang Technological University economist Tan Kong Yam told ST that realistically, Hainan’s near-term impact is unlikely to be another Shenzhen or Hong Kong.

“The more credible outcome is a rules-based platform for specific cross-border business models: importing components cheaply, doing assembly, testing, packaging or customisation on-island, then either re-exporting or accessing the mainland under clear conditions.”