Hainan attracts foreign investment through innovative policies - Part 2

The 35,400-square-km Hainan Free Trade Zone (FTZ) is 27 times the size of the other such areas on the mainland. It is 49 times the size of Singapore and nine times that of Dubai.

To attract big companies to set up their headquarters in Hainan, the local government has designated the 298-square-km Jiangdong New District in Haikou, the city capital, a business area.

Since 2018, when president Xi Jinping announced the establishment of the Hainan Free Trade Zone to mark the 30th anniversary of Hainan as a province, the local government signed over 200 agreements with different enterprises, 21 percent of which were foreign investors, and launched in 2019 the free trade account system, which provides enterprises a cheaper overseas financing channel.

Currently, sixteen state-owned enterprises, including China Travel Service Group Co., have relocated their headquarters to Hainan.

Famous for its tropical beauty and clean environment, Hainan became in 2020 China’s first Free Trade Port (FTP).

The province enjoys 30 more preferential policies than the other free economic zones. These offer extra benefits to its healthcare, telecommunication, Internet, finance and marine economy sectors, opening them up to a much greater extent than any other FTZ in China.

As a result, the negative list for market access that specifies off-limits or restricted sectors to foreign investors in the Hainan FTZ is shorter than the national version.

In 2019, a campaign was launched to attract 1 million highly qualified professionals over the next seven years to Hainan. Within five months, over 29,000 people, including 2,283 foreigners, moved to the region.

According to the HNA Group chairman, Chen Feng, “By 2022, Hainan Airlines will launch more than 40 new international flights that will depart from Hainan Province,” along with the capital Haikou City, new flights will also leave from Sanya.

“This will bring the number of flights connecting Hainan with cities around the world to 100 and turn the island into an international transportation hub, which will serve more than 2 million tourists a year,” he added.

Hainan is strategically located for the South China Economic Circle, North Gulf Economic Circle, ASEAN Economic Circle and Southeast Asian Economic Circle. Haikou is one of 15 coastal ports on “the Belt and Road” with 30 shipping routes.

Flights from Hainan can reach Vietnam, Hong Kong, Macao, and the Pearl River Delta region within 1 hour, and the Philippines, Brunei, Thailand, Myanmar, Laos and Cambodia in 2 hours.

Singapore, Malaysia, Indonesia, India, South Korea, Japan, and the Bohai Rim area are all within 3 hours flight and many major commercial cities in Southeast Asia are within a 4-to-5-hour journey.

As the only tropical island off China’s southern coast, Hainan is often referred to as “China’s Hawaii”. The province is a popular destination for mainland Chinese tourists, who enjoy its many beaches, tropical rainforests and warm climate.

In 1988, Hainan was designated as one of China’s first special economic zones (SEZs), putting it at the forefront of the opening-up campaign spearheaded by the architect of China’s economic reforms, Deng Xiaoping.

Shenzhen was one of the earliest pilots for attracting foreign investment. Currently, president Xi Jinping is looking to turn Hainan into a more liberal economy than any other part of China.

Despite these advantages, Hainan remains relatively underdeveloped compared to other regions in the country.

The GDP of Hainan stood at 553.2 billion yuan (US$85.6 billion) in 2020, an increase of 3.5 percent year-on-year, according to Wang Yu, deputy head of the Hainan Provincial Bureau of Statistics.

 

Through a series of measures, the province's investment and consumption levels continue to improve, its agricultural production grows steadily, its service industry picks up recovery speed, and its price levels are stable, according to Wang. The economic performance has returned to stability and is seeing an overall improvement, she added.

 

Hainan’s economy has a small industrial sector and relies heavily on resource extraction and services.

Resources that contribute to its sizeable primary industry include products such as seafood, tropical fruit, tea, and rubber, while its tertiary sector is strongly linked to the tourism industry.

Much of Hainan’s secondary industry, meanwhile, is associated with the processing of petroleum and other natural resources like rubber, as well as transport equipment and pharmaceuticals.

In 2020, the province's actual use of foreign capital exceeded $3 billion, a year-on-year increase of 100.7 percent.

 

Hainan is far from China’s first FTZ, it is however the first that covers a whole province, and it will have its own policies to attract foreign investment. Due to its nature as a self-contained island, Hainan also provides a unique testing ground for planners to implement new pilot policies.

With these goals in mind, China’s central government and the Hainan provincial government released a slew of documents outlining their plans to build the Hainan FTZ since the original announcement.

China’s economic planners envision the Hainan Free Trade Port, which will become operational in 2025, to be an economic area with trade and investment incentives akin to Hong Kong and Singapore – two regions known for their business-friendly policies.

In this vein, Hainan will cut the time needed to set up a business to three working days, reduce administrative approval items, and fully implement China’s national negative list.

Planners hope that Hainan’s geographic position in the south near the Pearl River Delta region and Vietnam will make it an important port to connect China with South and Southeast Asia.

This also ties in with China’s Belt and Road Initiative, where Hainan will be an important hub on the “Maritime Silk Road”.

Beyond establishing a free trade port and streamlined business environment, Hainan aims to develop and internationalize leading industries from where it already has strengths.

Some of the key policies regarding the masterplan for Hainan that investors should pay attention to include the liberalization of trade of goods and services, the facilitation of investment, opening-up of key sectors, and the free exchange of people, capital, and data.

 

One of the most significant features of the plan is the establishment of the ‘first-line’ and ‘second-line’ customs controls into China. Goods coming from overseas countries into Hainan will be subject to the ‘first-line’ control system. Here, the Hainan Free Trade Port is responsible for developing a list of goods/articles that are prohibited / restricted from import/export.

Further to this, a catalog of goods will be formulated specifying the goods that will be subject to import duties when entering the free trade port. Goods outside of these lists will be exempt from tariffs and be able to exit and enter the province freely.

In the investment sector, the plan establishes a series of policies aimed at liberalizing the trade of services by implementing a ‘minimum approval’ investment system, which will comprise of a special market access list relaxing accessibility to the Hainan Free Trade Port, as well as a Negative List for foreign investment access.

Broadly speaking, the masterplan puts in place a system where foreign firms gain broader market access in Hainan. It does so by implementing a new ‘market access commitment and entry system.’

The masterplan taps into growing opportunities for investors in traditional industries, as well as opening new industries for early development.

Preferential policies for industries have so far come in various shapes and forms. For example, the plan states that by 2025, income acquired from new FDI in tourism, modern services, and high-tech industry enterprises will be exempt from corporate income tax (CIT).

Telecommunications, financial services, medical insurance, education and tourism are some of the industries to be subject to opening-up and additional support in establishing within Hainan.

Another goal is to create a better environment for businesses in general, including to strengthen intellectual property right protections and the creation of a more open, fair, and predictable investment environment for all market players.

The plan proposes that an internationally competitive taxation system should be established, sticking to the principles of zero tariffs, low tax rates, and simplified taxation systems.

As a way to attract more business operations to Hainan, the masterplan has rolled out a preferential 15 percent income tax rate for eligible individuals, while CIT for encouraged enterprises will also be capped at 15 percent.

The flow of logistics and cross border funds will be encouraged through further opening the free trade port’s financial sector and supporting the setup of trading venues for financial products related to energy, shipping, property rights, equities, as well as clearing centers.

The effect and scope of the current visa-free entry policy will be broadened, while more accommodating traveling regulations will also be released to encourage talent in high-end industries to stay, reside, or work in the free trade port.

On the flow and security of data, China will expand the opening-up of the data field, innovating institutional design, and cultivating and developing the digital economy in the FTP.

Hainan has signaled that it plans to carry out international internet data exchange pilot programs to expand its communication resources and bolster its business landscape.

The government also wants to expand its already large tourism industry, tailoring it to specific services and markets.

Policies aimed at boosting tourism include expanding duty-free shopping, promoting medical tourism, and potentially allowing sports lotteries. Hainan currently offers visa-free traveling for up to 30 days for tourists from 59 countries. 

Foreign investors should evaluate the new policies, pilot projects, and wide scale plans that the government will implement as per a stipulated schedule. They can use the masterplan as a roadmap to assess which industries will be prioritized for growth and how they can tap into tax incentives and preferential policies.


To learn more about our services in China and Hainan Island, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at kristina@woodburnglobal.com.

DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.