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Hainan Free Trade Zone (1): Background and Positioning

Central Government Designates Hainan as Latest FTZ

Last year, Hainan Island of Hainan province was designated as the site of the country’s newest Free Trade Zone (FTZ). A medium-income province with a population of about 9.34 million and a GDP of RMB483.2 billion (RMB51,955 per capita) in 2018 [1], Hainan has a diversified economy, with industries ranging from agriculture to tourism and professional services. Long a major tourist destination, it was designated by the State Council as an International Tourism Island back in 2009.

The Central Government unveiled its blueprint for Hainan’s development in the Guiding Opinions of the CPC Central Committee and the State Council on Supporting Hainan’s Comprehensive Deepening of Reform and Opening Up issued on 11 April 2018 (also known as Central Document No. 12). This was followed by a speech in Hainan by General Secretary Xi Jinping (known as the “4.13 Speech”), in which he announced the decision to develop Hainan Island into a pilot FTZ [2]. The blueprint envisaged Hainan gradually moving towards becoming a free trade port with Chinese characteristics. Specific proposals were set out by the State Council in its Overall Plan of the China (Hainan) Pilot FTZ on 16 October 2018, and Hainan’s development has been in full swing since then.

Crucial Role in Reform and Opening Up

Since 2013, the Central Government’s focus has been on streamlining the relationship between government and the market so that the latter can play a bigger role in the allocation of social resources [3]. Under this initiative, Shanghai became the first pilot FTZ in 2013, followed by three others in 2015 and seven more two years after that. Besides promoting trade in goods through measures such as bonded zones, FTZs are designed to speed up the transformation of government, expand the areas of the economy being exposed to “opening up” reforms and investment, explore institutional innovation, and provide a testing ground for measures aimed at improving the country’s business environment. Each of the 11 pilot FTZs has its own role in the regional economy and helps the country to try out various new systems, such as the negative list for market access.

Unlike these 11 FTZs, which are further divided into several zones, the Hainan FTZ covers all 18 counties and cities of Hainan Island. According to Central Document No. 12, Hainan is designed to help China participate in globalisation and become an open economy at a higher level. Establishing the Hainan FTZ, therefore, is not just about improving the economy of Hainan province, but is also designed to contribute to China’s development as a whole.

At the same time, the establishment of the Hainan FTZ can create synergies with the Belt and Road Initiative (BRI). The South China Sea is China’s key artery for international shipping. If Hainan province can tap the advantages generated by the FTZ and help strengthen China’s maritime economy, it will be of great benefit to the utilisation of resources in the South China Sea and the development of ties with ASEAN and other neighbouring countries. The Overall Plan even designates the Hainan FTZ as China’s “key gateway to the Pacific and Indian Oceans”.

Building a Free Trade Port

The ultimate goal of the Hainan FTZ is to become a free trade port. In Central Document No. 12, there is a road map for the FTZ’s development:

Roadmap for Development of Hainan FTZ
2020-  A moderately well-off society in all respects with poverty eradicated in rural areas
-  Significant increase in the degree of international openness
-  First-rate ecological environment
2025-  Free trade port system basically in place
-  First-rate business environment
2035-  Free trade port system and operational mode becoming more mature
-  A business environment among the best in the world
-  Public services and environment for innovation and start-up up to global advanced level


Tax Incentives

In his “4.13 Speech”, Xi Jinping described free trade ports as having the highest level of openness in the world. The Hainan FTZ will explore a more flexible fiscal policy regime to try to build a more open business environment. In order to encourage trade, it may try out tax policies that have proved viable in other FTZs. For example, a selective tariff collection policy may be tried out in special customs supervision areas. Detailed fiscal policies will be announced by the provincial government in due course. Among the key policies recommended for trial implementation in the plans of other FTZs are the following:

Key Tax Policies for Trial Implementation in Other FTZ Plans
1.
Levying duties on goods for domestic sale according to the corresponding imported raw materials and components or according to the actual state of customs inspection upon application by enterprises
2.Exempting import duties on machines, equipment and other goods imported by manufacturing enterprises or producer service enterprises in the FTZ within the existing policy framework
3.Improving the pilot of port of departure tax rebate policy
4.Making positive efforts to study and improve tax policies suited to overseas equipment investments and offshore businesses in line with the direction of tax reform and international practice and on the prerequisite of preventing base erosion and profit shifting
5.Allowing qualified areas within the FTZ to apply for the implementation of shopping tax refunds for departing travellers in accordance with policy regulations
Source: Overall plans of 11 FTZs


Priority Industries

In Central Document No. 12, it is proposed that the Hainan free trade port should not focus on entrepot trade and the processing industries. Instead, the Overall Plan says that the Hainan FTZ will prioritise the development of three sectors - tourism, modern services and hi-tech industries.

Tourism

Hainan Island plans to develop itself into an international tourist centre. Tourism is an important industry on Hainan Island and cities like Haikou and Sanya are very popular with tourists. At present, Hainan’s tourism industry is supported largely by domestic tourists. Among the 67.45 million tourist arrivals recorded by the province in 2017, 66.33 million (98.3%) were made by domestic tourists [4].  The Overall Plan outlines the following policy direction for attracting more overseas tourists to Hainan:

  1. The government will promote air services between Haikou and Sanya and BRI countries and will encourage domestic and foreign airlines to open new international routes to Hainan Island or increase the frequency of their existing services.

  2. The Hainan FTZ will ease market access and allow foreign companies to invest in cultural and art organisations, with the mainland party holding the controlling share. It will also host more international exhibitions and other festivities to attract overseas visitors to Hainan Island.

  3. International medical tourism and high-end medical services will be developed.

  4. The capacity of high-end tourism services will be enhanced by launching new cruise lines, simplifying the entry procedures for yachts, and offering visa-free entry to visitors arriving on cruise liners.

Modern Services

Having an open, efficient and international business environment is the core feature of every free trade port. The Overall Plan focuses on accelerating the development of an open economy and stimulating the innovative development of the service industry in the following ways:

  1. Full implementation of the system of pre-establishment national treatment with a negative list, and allowing foreign investors to have wider access in a number of key areas including medical services, telecommunications, internet business, finance and the manufacture of new-energy vehicles.

  2. The Hainan FTZ will explore the establishment of a negative list management system for cross-border trade in services to promote the transformation and upgrading of trade.

  3. Support will be given to multinational corporations and trading companies to establish and develop global or regional trade networks and build regional offshore trading centres.

  4. Global planning and professional services institutions will be introduced in a number of professional services sectors, such as construction, arbitration, accounting, intellectual property rights (IPR), and convention and exhibition.

  5. Hainan’s access to the South China Sea will be used to develop shipping insurance, shipping arbitration, shipping transactions and other high-end shipping services and build a modern international shipping services platform.

  6. Financial opening up and innovation will be accelerated to serve the real economy of the FTZ. For example, steps will be taken to expand the cross-border use of RMB, deepen the reform of foreign exchange management, explore the facilitation of investment and financing exchanges, and expand the opening up of the financial sector.

Hi-Tech Industries

Hainan’s tropical climate is conducive to the development of agriculture and related studies. Agriculture is already one of the province’s leading industries. In 2017, it provided 21.6% of the province’s GDP and 40.3% of its employment, far higher than the national averages of 7.9% and 27.0% respectively [5].

Furthermore, as the province with the largest maritime area in the whole country, Hainan is ideally suited for the development of the maritime economy and related scientific studies. The FTZ policy will also facilitate the importation of medical devices and drugs and benefit studies in the medical sphere. The Overall Plan puts forward the following policy priorities:

  1. Agriculture: The Hainan FTZ will open its agricultural market further, build a global transit base for animal and plant germplasm resources, and encourage co-operation with foreign countries in the field of agricultural science and technology as well as the development of training bases for agricultural personnel.

  2. Maritime economy: An international platform for deep-sea scientific and technological innovations will be established through the introduction of international research institutions, universities and other frontier scientific and technological resources in deep sea areas.

  3. Medical research: International medical tourism and high-end medical services will be developed in the Boao Lecheng International Medical Tourism Pilot Zone, which will be given support in stem cell clinical research and the testing of new drugs. Tariffs on medical devices that need to be imported into the pilot zone will be cut.

Meanwhile, the Hainan FTZ will also implement some of the measures adopted in other FTZs, such as reforming the administrative system, optimising administrative functions, establishing IPR protection systems, providing easier access for foreign talents working in China, and strengthening the system of prevention and control of major risks. In other words, the Hainan FTZ will continue the approach of the other 11 FTZs while advancing towards the goal of building a free trade port through the development of key industries.

Policy Continuation

China has established 11 FTZs since 2013, each with its own positioning and advantages. When the first FTZ was established in Shanghai in 2013, the plan focused on the use of the international economy, finance, trade and shipping to serve Shanghai’s urban economy. When the second batch of FTZs were established in Tianjin, Guangdong and Fujian in 2015, the focus was extended to the regional economy (such as the coordinated development of Beijing-Tianjin-Hebei region, the development of the Greater Bay Area and cross-straits co-operation). With the establishment of the third batch of FTZs in 2017, more industries were targeted for development, such as advanced equipment manufacturing, the cultural industries, commodity trading and agriculture. For example, the Northern Zhoushan Island Area of the Zhejiang FTZ focuses on the trading of oil products, while the Yangling Demonstration Zone of the Shaanxi FTZ was given support to develop a BRI modern international co-operation centre for agriculture.

The Hainan FTZ will have tourism, modern services and hi-tech industries as its development priorities. At the same time, it will boost China’s maritime economy and facilitate the country’s economic development through the creation of a free trade port aligned with the international system. According to the Overall Plan, the Hainan FTZ is “a major measure demonstrating China’s determination to expand “opening up” and actively promote economic globalisation”. The importance of the Hainan FTZ in China’s long-term economic and policy development should not be under-estimated.


[1]  Source: Hainan Statistical Yearbook 2018
[2]  The Hainan FTZ covers Hainan Island alone and does not include the other islands that are part of Hainan province administratively.
[3]  Source: Li Keqiang: Several Issues Concerning the Deepening of Economic Structural Reform, www.people.com.cn, May 2014.
[4]  Source: Hainan Statistical Yearbook 2018
[5]  Source: Hainan Statistical Yearbook 2018

Content provided by Picture: C.H. Poon
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