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HAINAN: CHINA’S ISLAND-PROVINCE FREE TRADE PORT

HAINAN: CHINA’S ISLAND-PROVINCE FREE TRADE PORT
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By Charles F Moreira, Editor

Penang island once was  a free trade port – a shoppers’ paradise where goods could be bought duty-free for much less than they cost on the mainland.

For businesses and industries, this also meant cheaper equipment, hence lower cost of doing business.

The Federal Government ended the island’s free port status in 1967, after which Penang’s per capita income dropped as low as 12% below the national wage, with an increasing unemployment rate of 16%.

To revive Penang’s economy, the government later established free trade zones, where foreign investors could set up their assembly and manufacturing plants and import the components for their production duty-free, provided they also exported their  finished products.

This move attracted many multinational semiconductor integrated circuit, electronic equipment and computer manufactures to set up their production facilities in Penang island and on the mainland, thus providing jobs for tens of thousands of people and also enabling the development of Penang’s home grown manufactures and supporting industries.

However, transporting goods in and out of these FTZs involved additional Customs-related paperwork, facilities such as sealed containers and so forth, which added to administrative costs.

Meanwhile, amongst others, Singapore and Hong Kong remain free trade ports (FTP).

Enter Hainan

On 13 April 2018, the 30th anniversary of the establishment of China’s southernmost island Hainan as a province, President Xi Jinping announced plans to turn the whole island-province into a pilot free trade zone (FTZ), and that a free trade port (FTP) would be built in the area.

Whilst policies related to FTZs and FTPs may vary between different countries, in China FTZs are best-known for focusing primarily on institutional innovation – where governments in FTZs introduce policies specific to their zones which are intended to facilitate trade and investment there.

On the other hand, as an FTP, Hainan is looking beyond small-scale trials of innovative economic policies associated with FTZs, and instead it will focus on creating a much freer international business environment and transforming into a major international trading, financial and shipping centre.

Xi said the decision was in line with China’s determination towards liberalisation and globalisation and that China welcomes investors from all over the world to do business in Hainan, and that the island-province should become an example of high-quality development – including for information technology industries and modern service industries such as tourism, the internet, and exhibitions.

A pilot zone for what’s referred to as an ecological civilisation will also be set up on the island and authorities will strictly enforce environmental protection rules and reforms will be made to improve people’s lives.

President Xi also said that Hainan should introduce education resources from overseas. A series of reforms will be made to ensure professionals from across the world can start up businesses and gain residency on the island.

For years, the island-province with its blue waters, towering coconut trees, year-round sunshine and sandy beaches had attracted people from around the world.

In 1992, Hainan established the Yangpu Economic Development Zone, the first in China to be comprehensively developed by foreign investors.

In 2000, Hainan allowed visitors to be issued with visas-on-arrival and the following year the town of Boao in Hainan became the permanent venue for the annual Boao Forum of Asia.

On 21 September 2020, the State Council (China’s cabinet), issued a masterplan for three new pilot FTZs in Beijing, Hunan and Anhui amid efforts to elevate the country’s opening-up to a higher level. These three brought the number of FTZs in China to 21, from the 18 pilot FTZs established earlier in areas including Shanghai, Guangdong, Liaoning, Hainan and Shandong.

FTP Masterplan

On 1 June 2020, the Central Committee of the Communist Party of China and the State Council jointly issued a masterplan to build Hainan into a high-level FTP.

According to the plan, the FTP system would focus on the establishment of trade and investment liberalisation and facilitation in Hainan by 2025, which will become more matured by 2035.

Six Liberalisations

The Six Liberalisations planed for Hainan FTP are to ensure freedom in – Trade, Investments, Cross-border capital flow, Travel, Logistics and Data flow.

The focus of future policies is to achieve a zero-tariff situation in trading goods and relaxed restrictions on trading services, for Hainan to adopt a modernised industrial system with Hainan’s own characteristics at the centre – namely in industries such as tourism, services and high-technology.

The plan aims to facilitate free trade, investment and cross-border capital flows in Hainan and says designated imported goods will be exempted from tariffs on the whole island.

It lists plenty of work emphasis in periods up to 2035. Among the many policies in the plan, those seen to be taking the lead in the FTP are:-

Innovative management on import-export

Hainan will establish more special custom supervision regions to help the island implement more flexible import-export management. It will be a convenient and efficient “single window” while dealing with imports and exports with overseas countries.

Hainan will provide a list of goods and articles prohibited and restricted from import and export by the port, while the goods and articles outside the list shall enter and exit freely .

Also, a list of imported taxable commodities will also be formulated, but goods outside the catalogue will be exempted from import duties when entering the free trade port.

Reduce limitations on cross-border services trade

In the key areas, Hainan will implement domestic rules that affect the freedom and convenience of the services trade.

Hainan FTP will treat both foreign and domestic cross-border services providers the same, will remove various barriers in services trade, such as cross-border delivery, overseas consumption and movement of people.

The plan will also implement systemic innovations in the areas of intellectual property transfer, utilisation, and taxation policies, and standardise intellectual property securitisation protection, by building the Hainan International Intellectual Property Exchange.

Widen the opening-up of the finance sector

According to the plan, Hainan will open up the financial industry, by supporting the construction of international energy, shipping, property rights, equity, and other trading venues and speeding up the development of settlement centres.

In addition, Hainan will support qualified overseas securities fund and futures institutions to set up wholly-owned or joint venture financial institutions on the island.

It will also support financial institutions that innovate financial products and improve service quality and efficiency, based on the development needs of key provincial industries such as tourism, modern services, and high-tech industries.

Moreover, in an effort to boost foreign investment, China will implement a minimal approval process on investment by making special lists for relaxing barriers to market access for the Hainan free trade port and negative lists for foreign investment market access.

The supervision system will be based on credit supervision and compatible with negative lists management.

Tourism

Tourism is the first of the 12 key industries in Hainan and the island-province encourages the establishment of Sino-foreign joint venture travel agencies, strives for relevant policy support, relaxes market access restrictions, and introduces high-quality resources to help the healthy development of tourism. In addition, individuals or teams from 59 countries and regions can travel and enter Hainan without a visa.

Already, people from mainland China and abroad have been coming to Hainan for specialist treatment for ailments such as cancer and so forth.

Official figures show 1.4 million tourists visited Hainan in 2019, up 12% from the previous year, with 2019 tourism revenue worth US$14.8 billion.

Hainan has currently opened 44 international air routes and 370 domestic ones. It is one-hour flight from Vietnam, Hong Kong, Macau, and the Pearl River Delta region and two-hours away from  the Philippines, Brunei, Thailand, Myanmar, Laos, Cambodia and mainland China, and three hours away from Singapore, Malaysia, Indonesia, India, South Korea, Japan, and the Bohai Rim area.

Besides tourism, China is also working on developing Hainan as a global shopping destination by 2025. According to China’s Xinhua News Agency, tourists already say that prices in Hainan are more favourable than in Japan or South Korea.

Modern services and high-tech

Besides tourism, Hainan will focus on attracting and developing modern services and high-technology industries.

Already, a number of the world’s top 500 leading enterprises and industries have invested in Hainan, including companies such as Singapore’s Temasek, the American venture capital and investment management firm SOSV, the audit and assurance, consulting, financial advisory, risk advisory, tax, and related services consultancy group Deloitte.

Also, are the China-based and New York Stock Exchange listed international foreign-venture private hospital and clinic network United Family Healthcare altogether with 600 full-time doctors from 26 different countries and regions working for the group overall plus over 1,000 part-time experts and over 1,000 nurses on the team, Qilu Pharmaceutical – a leading vertically integrated pharmaceutical company in China which focuses on the development, manufacturing and marketing of active pharmaceutical ingredients (APIs) & finished formulations.

According to Huang Qian, Organisational Deputy-Director of the Communist Party of China Hainan Central Committee over two months in 2018, over 10,000 professionals especially in the high-end manufacturing and technology disciplines had come to work in Hainan.

As an FTP, Hainan will implement institutional innovations such as province-wide one-stop business registration and an integrated big data society governance system.

All these factors will enable Hainan to become a global centre for trade in services.

Meanwhile, Hainan will be a pivot of China’s Belt and Road Initiative, which will not only promote multi-lateral free trade and contribute to regional economic integration but also will share the benefits brought from China’s development with more countries.

Will Hainan replace Hong Kong?

The above plans have some asking whether Hainan will replace Hong Kong as a new financial and economic hub.

“The position and priority areas of Hong Kong and Hainan will be different and complimentary, so Hainan will not be a threat to Hong Kong”, said Lin Nian Xiu, Vice-Chairman of China’s National Development and Reform Commission.

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