Duty-free hub Hainan’s May Day holiday retail sales fall flat in first post-pandemic test for ‘China’s Hawaii’

The tourist island at the southern tip of China saw weak retail sales during the country’s first ‘golden week’ since Covid restrictions were axed
Hopes are high among some investors, nonetheless, as China aims to turn Hainan into the world’s largest free-trade port by 2025

China's border reopening

Zhao Ziwen

Published: 8:00am, 13 May 2023

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Hainan, a tourist hub and shopping mecca at the southern tip of China, saw disappointing retail sales during the country’s first Labour Day holiday since Covid-19 restrictions were lifted.

Despite this, some investors remain positive about the tropical island’s outlook as the central government deepens its policy support aimed at cementing its position as a duty-free haven.

During the recent “golden week” holiday, Hainan’s retail revenues came to 883 million yuan (US$127 million), marking an 11.1 per cent drop compared with 2021, the year the island dubbed “China’s Hawaii” hit its peak sales.

Even with an 8 per cent increase in visitors compared with 2021, shopping trips as measured by footfall in shops and malls fell 10 per cent.

Though this year’s retail revenue trounced 2022’s 399 million yuan when Covid-19 restrictions were at their height, the figure was seen as disappointing because people were now free to travel completely unhindered for the first time in three years.

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China plans to turn Hainan into the world’s largest free-trade port by 2025, using lower taxes and looser visa rules to attract investors, businesses and individuals.

The aim is for Hainan, an island roughly the size of Taiwan and known for its tropical scenery and beaches, to have its own independent customs regime in place by the end of 2025.

Beijing hopes to transform it into an offshore financing and duty-free shopping mecca, in a move that would make it competitive against the likes of Hong Kong and Singapore.

China’s reopened international borders meant many high-end consumers may have chosen to head abroad during this year’s golden week, thus putting a dent in Hainan’s sales numbers, according to Zhou Tao, head of the hotels and hospitality group for Greater China at Jones Lang LaSalle (JLL).

Furthermore China’s economy, severely damaged by three years of rolling Covid-19 lockdowns and other measures, is still far from making a full recovery, and this in turn may have had an impact on consumption.

“China’s economic recovery is slow, so consumers’ confidence can’t be regained quickly, especially for luxury goods,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management.

Hainan became a magnet for Chinese tourists, particularly wealthy ones, in 2021, as domestic travel was permitted at a time when international trips were nearly impossible.

In that year the island’s retail revenue skyrocketed to 993 million yuan, a more than six-fold increase compared with 2019, before the pandemic.

China’s consumer price index (CPI) rose by only 0.1 per cent in April from a year earlier, according to the National Bureau of Statistics (NBS).

“The three years of the epidemic have led to a more rational consumer and a weakened willingness of the middle class to spend on luxury goods,” Zhou said.

China’s duty-free companies made huge price cut in 2021, which made them less profitable. They have therefore gradually increased prices and made them less attractive to consumers and, crucially, to “daigou” shoppers.

“Daigou”, meaning “buying on behalf of” in Chinese, is used to describe professional shoppers who buy sought-after products in regions with different tax system and then resell them in mainland China, pocketing the price difference.

The resumption of international travel resumes, enabling daigou in other places will also weaken the price advantage in Hainan.

But despite this year’s less than stellar performance, by 2025 all goods on the island should be duty-free, giving investors hope.

Luxury goods giant LVMH recently said it has a great interest in Hainan’s customs establishment, and will consider participating more in the market.

Zhou said that as the government makes progress with the establishment of Hainan’s duty-free zone, the resort’s business performance will only improve.

“Hainan island, especially Sanya, as long as tourism-related products and services remain high quality and innovative, and strong tourist traffic continues, the retail performance in duty-free stores will maintain their growth trend,” he said.