Economy

China’s Hawaii gets a boost

Hainan’s free trade plan starts to take more shape

Hainan-w

Haikou in Hainan: set to grow thanks to island’s free trade status

When the plan for a free trade zone in Hainan was first announced two years ago (see WiC405) the island joined a crowded field, with 11 other zones claiming similar status in China.

Zones like these are typically launched with great fanfare, triggering a surge in property speculation (see WiC220) and the setting up of representative offices by trading companies and professional services firms.

Often the story then goes rather quiet for a while. Shanghai’s free trade zone, probably the best known, took a similar path in 2013, although it has doubled in land area since then, welcoming Tesla as a high-profile tenant last year. Advances in other areas have been slower, including a commitment to freer convertibility of the renminbi for the companies working there. There have been pilot trials of reforms for the currency and cross-border investment but progress has been delayed by other imperatives, such as controlling capital flight.

A key question for Hainan is how its free trade zone is going to be different to others. Its backers say that the island already stands out because of its designation as a ‘free trade port’, the first of its kind in mainland China. What that means is open to interpretation, although local officials are hoping for zero tariffs on the majority of imported goods.

Maybe that will get more attention amid growing protectionism in global trade. But the latest master plan for the zone, which was released at the start of this month, hardly anticipates overnight success. Instead it’s a three-phase approach: the key reforms in trade and investment will be delivered by 2025; the zone’s operational model will reach maturity by 2035, taking on ‘an influential role in China’s economy’; and Hainan will be wielding international sway as a trading hub by 2050, putting it on the map in a way similar to Hong Kong and Singapore.

Special treatment seems likely to focus on a few key sectors first. Policymakers are talking up the prospects for a local tech industry, although it’s hard to see how the island will compete with established hotspots like Shenzhen, Beijing and Hangzhou. The services sector looks like a more promising priority, especially tourism, with more than 83 million people already visiting Hainan last year. Only a fraction came from outside China, despite visa-free schemes for tourists from many countries, so efforts to attract more holidaymakers are likely to intensify.

Planners will also be promoting spillover sectors like medical tourism and elderly care. Local newspapers reckon that Hainan’s tropical climate can make it a retirement hotspot of the future, with more of China’s wealthier pensioners choosing to reside there.

What’s the evidence that Hainan has a chance of making good on the plan? Companies in the tech and tourism sectors are already being offered 15% income tax rates, the lowest available nationally. Visitors to the island will be allowed to spend up to Rmb100,000 ($14,098) in tax-free shopping, more than three times the previous limit. And in another sign of momentum this month China Eastern said it was joining forces with partners including Trip.com, China’s biggest online travel agency, to start a new airline on the island. That sounds bold at a time when the aviation sector is struggling to recover from the Covid-19 outbreak, but it makes more strategic sense in supporting Hainan’s economy over the longer term, especially when HNA Group, the controlling shareholder of the island’s established carrier, is struggling to survive (see WiC485).

China’s aviation regulator also put out a statement this month that it will grant rights to international airlines to operate between Hainan’s two main airports and destinations in other countries, without the need to touch down in their home nations on the way.

Under these ‘seventh freedom’ privileges European carriers could fly passengers or cargo between Hainan and points in Japan or the US without hubbing through their home airports. It’s another signal of how the authorities want to make Hainan more accessible from other parts of the world.

Another way of looking at China’s free trade zones is as places of experimentation for new policies. If the policies work they are applied on a national basis, although the zones get an initial period of benefit if they introduce them effectively.

Hainan’s officials will now want to exploit the window that is being opened to them. Their argument is also that the whole island is part of the free port plan, making it much larger than China’s other special zones and offering more scope for experimentation. Probably more significant is that Hainan is an island, allowing greater room for manoeuvre in how new ideas are applied. Gatekeepers at other special zones have to wrestle with the challenge of companies gaming the system, as goods, capital and people cross into adjoining areas. Hainan’s island identity should make that a little harder, especially for the illicit trading of physical goods.

One irony is that the island has a reputation as a rule-breaker, including a period in the 1980s when it was notorious for smuggling, particularly cars. Island officials say it will be different this time around and that they will take a harder line against improper behaviour. “We will fight smuggling with satellites and radars on sea and on land,” the island’s Party secretary promised this month, adding that officials in Hainan’s anti-corruption team will also be vigilant in ensuring that free trade policies aren’t exploited or abused.


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