The island-province of Hainan, considered one of China’s most beautiful and bustling special economic zones (SEZ), undoubtedly demonstrates the Chinese government’s determination to open wider to the outside world, promote economic globalization and enhance the confidence of investors, especially foreign ones.
Recently, China eased foreign investment rules for Hainan’s Free Trade Port (FTP), allowing overseas funds into sectors such as mining, online trading, and market and social research.
According to China’s National Development and Reform Commission, restrictions on foreign shareholding in carmakers will also be lifted.
Since first designated as an SEZ in 1988, Hainan, with 930 miles of coastline, has commanded a special role in China’s development; and in recent years the country’s leadership has begun to promote the island province as a key shopping and health tourism destination.
Since 2014, Hainan has seen rapid growth in foreign and domestic tourism, rising investment from foreign and domestic sources, and consistent GDP growth performance – placing Hainan at the forefront of China’s grand economic masterplan.
Setting the stage for global business development, China designated a series of SEZs geared towards the facilitation of international trade. Among these zones were cities such as Shanghai and Shenzhen, chosen for their coastal location and proximity to key trade routes.
However, Hainan stands out as the only provincial-level SEZ to be among the first five locations selected for elevated economic status.
These zones offer different incentives, such as tax breaks and autonomous capital control, to attract foreign investment. This initiative has successfully transformed China’s SEZs into formidable economic powerhouses.
SEZs are typically linked to Hong Kong, a city long considered a bastion for foreign pivots into the Chinese market. However, sporadic periods of political unrest, as well as the recent up-cropping of major Chinese urban centers like those of the Pearl River Delta have served to undermine tourism and foreign investment in Hong Kong.
As a result, Hong Kong’s contribution to national GDP began to taper in the early 2010s with the rise of domestic substitutes.
In the vacuum created by a declining Hong Kong economy, Beijing determined that the best path forward to promote retail tourism, trade and investment was by diverting significant resources to its powerful SEZs – especially to the island of Hainan.
In just the three year period spanning 2017-20, China has opened visa-free travel to Hainan for 59 countries, laid plans for a US$ 2.5 billion highway loop to accelerate the island’s ascension to an international tourism and consumption center, and established a Free Trade Port (FTP) in 2020.
In order to support the advancement of Hainan and attract investors, the Chinese government outlined a plan that includes a series of measures that leverage infrastructure investment, reduced economic controls, and tax advantages, among other incentives.
The Masterplan proposes the longer-term objectives of establishing a fully liberalized free trade port by 2025, creating a world-class business environment by 2035, and fostering the island’s strong international influence by 2050.
Thanks to the Hainan FTP designation, the government authorized a series of tax and legal system changes aimed at introducing zero-tariff policies and a new import and export system, simplifying foreign trade while strengthening the management of goods between the island and mainland China.
While implementation will occur between the present and 2025, government bureaus have already moved to action and announced the removal of tariffs, duties, and value-added taxes from a variety of inbound raw materials.
As an SEZ, Hainan manages its own Negative List, also known as the master list that gives permission for foreign participation on an industry-by-industry basis. Originally earmarked for release by the end of 2020, Hainan’s refreshed Negative List drastically lowers barriers to market entry across strategic industries.
Another goal in Hainan is to reform and expand certain financial sectors and economic resources to include foreign investors while immigration policies will be adjusted to attract foreign talent, academic initiatives, and business activity.
Meanwhile, transportation regulations will be relaxed in terms of shipping and airspace, storage costs will be kept at a minimum through subsidies to establish Hainan FTP as a regional logistics hub, and the island’s digital economy will be cultivated and opened to foreign operators.
Hainan will become an attractive hotspot for both national and international companies thanks to the introduction of zero-tariff laws and import tariff exemption for key industries, lower income tax for enterprises incorporated within Hainan as well as certain qualified individuals, and the reform of the overall tax regime to reduce the tax burden on locally operated enterprises.
Between 2020-25, Hainan’s corporate income tax (CIT) and individual income tax (IIT) will max out at 15% for all “encouraged” industries outlined within the Negative List, which is significantly lower than the comparable national rates that stand at 25% and up to 45%, respectively.
By 2035, CIT benefits are expected to expand beyond encouraged industries and influence a wider scope of the economy while new IIT rates will be applicable to anyone residing and working in Hainan for at least half of the fiscal year.
Hainan’s strong economic performance is evident. The island’s average year-over-year GDP growth has clocked in at 9.1% since 2017, which is one-third greater than the comparable rate of 6.6% across the mainland. While it remains a far distance from economic giants like Shenzhen in terms of contribution to overall Chinese GDP, the strength and consistency of Hainan’s economic growth when compared to Mainland Chinese benchmarks is noticeable.
Additionally, while Hainan has seen a year-over-year 102% increase of foreign-funded enterprises as well as a 108% increase in the use of foreign capital year-over-year, Hong Kong’s foreign direct investment dollars fell 34.4% from US$104 billion to US$68.4 billion in 2018, and the trend does not seem to be slowing.
As travel has been restricted to domestic-only travelers due to the COVID 19 pandemic, domestic tourism has been allured to Hainan through attractive duty-free offers.
To recover some of the money spent by its overseas tourists and reduce the economic impact of the trade tensions with the US, China has tripled its quota for duty-free shopping in Hainan to CN￥100,000 (US$15,226), expanded the duty-free product catalogue, and removed limits on the quantity of items that can be purchased by consumers.
In a further effort to boost tourism, Hainan will ease market access requirements for foreign investors to host temporary exhibitions and festivals, as well as to invest directly in cultural and art institutions.
Besides traditional tourism, Hainan will seek to promote “modern services,” including healthcare and elder care, such as Florida in the US. These industries interrelate with tourism plans, as Hainan seeks to establish itself as China’s leading medical tourism hub.
Medical tourism plans go beyond elder care, however, with cosmetic surgery, rehabilitation, and beauty care among the other medical tourism sub-sectors being developed.
Besides treating patients directly, planners hope to develop an associated ecosystem proficient in medical, pharmaceutical, and biotech R&D.
Due to political tensions and the negative effects of the pandemic on the economy, some retail giants have decided to pull out of Hong Kong while turning their attention to shopping centers such as the mall on Hainan’s Haitang bay strip.
Many international brands are considering taking advantage of Hainan’s growing economy and capitalizing on the still strong Chinese consumer market, which continues to expand quickly and represents one of the most profitable sources of revenues for global brands.
Hainan will focus its high-tech investments in sectors where it holds unique advantages, unlike other regions that focus on more traditional high-tech industries.
Accordingly, the province’s tech plans will largely tie in with its geography, focusing on agritech, biotech, deep-sea technology and industries such as aerospace.
Qualified tech startups may also enjoy free rent and access to government venture capital funding. Hainan has already set up a RMB 500 million (US$63.7 million) fund for startups.
Foreign investors should evaluate the new policies, pilot projects, and wide scale plans that the government will implement as per a stipulated schedule. The goal will be to establish of a fully functional Free Trade Port by 2035.