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China wants to turn Hainan into the world’s largest free-trade port by 2035. Photo: Xinhua

China’s Hainan free-trade port plan enters ‘crucial year’ as Xi Jinping calls for ‘bigger’ economic opening

  • President Xi Jinping has said an independent customs regime must be in place in Hainan ‘as scheduled’ by 2025
  • A new investment guide for the island says 2022 is a ‘crucial year for Hainan free-trade port’ and its customs system
Hainan

China is inching closer to implementing an independent customs system on Hainan by 2025, with President Xi Jinping saying during a trip to the island province this week the regime must be in place “as scheduled”.

The plan to introduce a separate customs zone is part of a government blueprint to transform Hainan into the world’s largest free-trade port, creating a centre for offshore financing and duty-free shopping that will lure tourists and businesses with an internationally competitive tax regime and relaxed visa requirements.
Beijing has high hopes the transformation will boost domestic consumption – a key part of the new “dual circulation” economic strategy – and make the island competitive with the likes of Hong Kong and Singapore.

“The free-trade port is a complicated, systematic project … It will be long-term work,” Xi said during a field visit on Wednesday.

‘Changes are taking place’ as Hainan aims to rival Hong Kong, Singapore

However, he added the province must be “sealed off for [independent customs] operations as scheduled”.

Hainan, an island roughly the size of Taiwan that has been dubbed China’s Hawaii for its tropical scenery and beaches, was earmarked four years ago as a way to showcase the country’s economic opening.

Authorities passed legislation in June last year that will remodel the 35,000 sq km island into a free-trade port by 2035.

To attract talent and financing, the province of 9.5 million people has reduced its income tax rate for selected individuals and companies to 15 per cent, far lower than the mainland and closer to the average 17 per cent in Hong Kong.

Hainan free-trade port has been talked about for many years, but there’s no content that is very special so far
Ding Shuang

The island will focus on liberalising trade and investment by aiding the free, orderly, safe and convenient flow of production and establishing a modern industrial system, according to a new investment guide released on Wednesday by the Hainan commerce department and multinational accounting and advisory firm Deloitte.

“The year of 2022 is a crucial year for Hainan free-trade port and a key preparation period for independent customs operations across the whole island,” the guide said.

Currently, 25 sectors will be given special treatment including international tourism, duty-free shopping, finance, conferences and exhibitions, international education, Medicare, the digital economy, ocean research and aerospace.

“Hainan free-trade port has been talked about for many years, but there’s no content that is very special so far,” said Ding Shuang, chief Greater China economist at Standard Chartered Bank.

01:25

China aims for modest 5.5% GDP growth in 2022, citing economic pressures

China aims for modest 5.5% GDP growth in 2022, citing economic pressures

The province has abundant tourism resources and advantages in ocean research, but it lags behind other cities like Shanghai in terms of offshore markets and finance.

“Construction of free-trade zones need to be based on their advantages, and they won’t solve immediate problems,” Ding said.

There has been speculation Hainan will relax restrictions on horse racing, gambling and the free flow of capital and information, which would underline its determination to challenge Hong Kong as an international financial centre and gateway for foreign investment to the mainland. But there have been no concrete steps taken on these matters to date.

Xi said China’s economic opening needed to be “bigger in scope and depth”, while highlighting the role that tourism, modern services, hi-tech industries and tropical agriculture could play during his trip this week.

But he also said the “correct political direction” must be firmly upheld, including the socialist system and Communist Party leadership.

“We must resolutely insist on national security, strengthen risk identification and prevention, and coordinate reform, development and stability,” he was quoted by state media as saying.

The province registered 1,936 new foreign-invested enterprises last year, up 92.6 per cent year on year.

However, the amount of utilised foreign capital was about US$3.5 billion in 2021, accounting for only 2 per cent of the national total. Foreign trade was valued at 147.7 billion yuan last year, 0.4 per cent of the national size.

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Comparatively, Hong Kong accounted for more than half of China’s accumulative foreign direct investment and about 6 per cent of its annual trade value.

He Weiwen, a senior fellow with the Centre for China and Globalisation, said Beijing’s push to turn Hainan into a commercial hub was not designed to cast Hong Kong aside.

“The status of Hong Kong has not been decided by administrative regulations, but formed by history and through market forces. Although the impact on the city needs to be further observed, these regions are not against each other, but have room to cooperate,” he said, citing the example of Shanghai and Hong Kong, which are both international financial centres.

“Hainan is of strategic, not solely economic, consideration because China needs a gateway to the global market,” he said. “From a trade perspective, its development still relies on local industries and supply chains.”

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Former vice-commerce minister Wei Jianguo said Hainan should take note of international trade and investment rules and learn from the likes of Rotterdam and Singapore.

“We still need to explore how to implement zero-tariff, zero-subsidy and zero-barriers,” he wrote in an article in the Communist Party’s Global Times on Thursday.

“The future goal is to maximise the utilisation of production factors such as capital, talent and information. They are not confined to southern China, but available across the whole country, Southeast Asia and even the whole world.”

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