News Analysis: Hainan Free Trade Port: Another Hong Kong?

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BEIJING, June 29 (TMTPOST) – China will inject 3.5 billion yuan (about US$495 million) into Hainan province in 2020 to kick-start a free trade port across China’s southernmost tropical island, the country's top economic planner announced last week.

The massive fund, to be allocated from the central government’s annual budget and granted in two phases this year, will be used for infrastructure and public services, said the National Development and Reform Commission (NDRC).

An array of fundamental, far-reaching projects will be chosen for the central government’s fiscal support. They are mainly infrastructure projects, such as bonded zones, digital information platforms, Yazhou Bay Tech City, Boao Lecheng International Medical Tourism Pilot Zone, Yangpu Economic Zone and tourism-related shopping centers. The fund will also be earmarked for the prevention and control of the novel coronavirus.

From September 2013 to August 2019, China approved 18 free trade zones, including Qianhai in Shenzhen, Hengqin in Zhuhai, Nansha in Guangzhou and Lingang in Shanghai. Hainan Free Trade Port stands out with its area of 35,000 square km, the largest of them all.

But the Hainan free trade port is distinct not just by size. It is the brainchild of Chinese president Xi Jinping, who became General Secretary of the Communist Party of China in November 2012 and President in March 2013. According to the Master Plan for Building Hainan Free Trade Port jointly released by the Central Committee of the Communist Party of China and the State Council, the free trade port initiative was “a major move” in China’s economic reform and opening-up process, “planned, implemented and promoted by General Secretary Xi Jinping personally.”

In April 2018, Xi proposed the creation of a free trade trial zone that covers the entire island, the predecessor of the free trade port. Hainan was designated as a Special Economic Zone in April 1988 by Deng Xiaping, the architect of China’s economic reform and opening-up program. Deng said in the 1980s that it would be “a great victory” if China develops Hainan island, which is about the same size as Taiwan island.

Over the following two years, many documents from the state council, the National Development and Reform Commission, ministries, and provincial governments were issued to facilitate the development of the island.

In October 2018, the State Council unveiled the Master Plan for Hainan Free Trade Trial Zone in order to implement Xi’s strategy. Five more State Council and National Development and Reform Commission documents followed in over a year, laying out guidelines on national tropical rainforest parks, tourism and shopping centers and other matters the province to lay the groundwork for the development of a free trade zone.

In April 2020, the state council, on behalf of the national legislature, announced the changes to the law, allowing foreign ships to travel temporarily between the ports of Hainan island and delegating power to change the purpose of land use to the provincial government.

About 10 documents by ministries and central government agencies were issued, according to the official website of the free trade port. Of the 10 documents, the most comprehensive one was released on November 19, 2019. It focused on four aspects, including investments and trade, financial services, shipping and information platforms.

A Package of Bold Policies

On April 11, the Central Committee of the Communist Party of China and the State Council jointly issued a document titled “Guidelines on Supporting Hainan’s Further Economic Reform and Opening up”, which introduced the concept of the free trade port at the end of the document. The document, released against the backdrop of the U.S.-China trade tensions and anti-globalization wave, demonstrated China’s firm commitment to opening up its economy.

The document also provided a timeline for achieving the goal. By 2020, rural poverty is eliminated; by 2025, the institutions and regulations of the free trade port are established preliminarily, with the business environment being the top-rated in China. By 2035, the institution of the free trade port is more mature, with the business environment being world-class. By 2050, an economically prosperous Hainan is built.

On June 1, the CPC Central Committee and the State Council jointly issued the Master Plan For Building Hainan Free Trade Zone, marking the first time for the phrsae of the "free trade port" to appear in the title of the Chinese government’s document.

Shen Xiaoming, the governor of Hainan province, said in a press conference in June that no permits and approvals are required in the island as long as the law does not prohibit it. Registration is enough for a business to start operations while approvals are no longer required.

A Cross-border Negative List will be made by the end of this year. Investments into the sectors that are not on the list will be allowed into the island without administrative approvals, according to Shen.

Zero tariffs are applicable to production materials, raw materials, vehicles and consumer goods for residents on the island only prior to 2025. By 2035, all goods except those on the negative list are tariff-free. Production materials refer to planes to an airline and ships to a cruise tourism company.

What’s more, when these goods enter other parts of China across Qiongzhou Straits, they are free of additional taxes if their value is increased by 30% on the island, according to the master plan. A “second customs line” will be established by 2025, which separates the island from other parts of China in terms of tariffs.

In terms of income tax, qualified individuals and companies enjoy a 15% tax rate ceiling, while the ceiling is 45% in other parts of China. Hong Kong, known for its low personal income tax rate, levies up to 17% personal income tax. High-end or highly sought talents are entitled to such a tax rate if they live on the Hainan island for over 183 days.

Restrictions on market entry into tourism, modern services and high-tech sectors will be eased significantly. Modern services include aviation, telecom, finance, health care, education, culture and sports, according to the document. Foreign nationals can be legal representatives of state-owned enterprises, which is prohibited in other parts of China.

In order to transform Hainan into a shopping mecca, Deputy Finance Minister Zou Jiayi explained that Chinese citizens will be allowed to buy up to RMB100,000 (US$14,000) worth of products at duty-free shops on the island per year, up from RMB30,000 currently. Currently the duty-free limit in Hong Kong is RMB5,000. The senior official encouraged her fellow Chinese to “carry more money” when they visit Hainan next time.

Seventh freedom flights, will also be allowed on the island, the first time in any Chinese place other than Hong Kong. Under the seventh freedom of the air, a foreign airline can fly between the island and a third country without touching on the land of the country where the airline is registered. The new policy will help build tourism and shopping centers on the island.

China Eastern Airline quickly seized the opportunity brought by these new policies to set up a joint venture with partners from the island. On June 13, it launched Hainan-based Sanya International Airline to tap into growing demand from international passengers.

Tourists will be allowed to visit the island for up to 15 days without a visa, according to the package of new policies. It is unprecedented in the history of China given the emphasis the country has historically placed on its sovereign independence.

Hong Kong’s Rival?

Hainan island, formerly part of Guangdong province, has a long history of being China’s pioneer in economic liberation. It was boosted by the central government to a province-level administrative region from remote backwater countryside in April 1988. However, the administrative upgrade was followed by China’s first real estate boom on the island and a brutal bust characterized by many unfinished office and apartment buildings as well as colossal distressed debts in 1993.

Past lessons have been learned. The registration of new property development companies is not welcome on the island. The provincial government consciously shunned property companies while introducing policies favourable to the manufacturing sector.

Hainan provincial party secretary Liu Cigui said in a press conference in June that Hainan strictly controls new property projects in an effort to prevent the island from becoming a “factory of houses”.

The de facto No.1 official in the province said that the government has suspended selling land or approving new property projects since 2015. “The land in Hainan is limited and there are lessons in the past,” he said.

As of 2015, there were over 20,000 property development companies in Hainan and many municipal governments’ primary source of revenues was from the sale of land. In order to prevent a housing bubble, assessment standards for government officials were changed to exclude GDP performance, fixed assets increase and fiscal revenues, which effectively terminated local officials’ dependence on land sales. In June 2018, restrictions on buying properties in Hainan were imposed.

“It looks that past mistakes in the housing sector will be repeated in the wake of the unveiling of special policies for the free trade port,” said Liu.

He also stressed that the use of clean energy only will be implemented. Plastic products, including plastic bags and plastic spoons or forks, will be banned by the end of this year. By 2030, gas-powered cars are no longer sold across the island; farmers will all use natural gas as energy source to replace tree branches; and at least 62% of the island will be covered by forests.

He also highlighted a ban on gambling and porn industries across the island.

Lin Nianxiu, deputy director of NDRC, envisioned the future of the free trade port, not as a rival to Hong Kong, but a complement to the former British colony.

The pillar industries of Hainan are tourism, modern service and high-tech sectors and thus it will not impact Hong Kong negatively, said Lin.