China’s Hainan tries to put aside past failures as it forges ahead with new free-trade port plan

06-May-2021 Intellasia | South China Morning Post | 5:02 AM Print This Post

On a muggy workday afternoon in April, dozens of businesspeople streamed into a government service centre in Hainan’s Jiangdong New Area, an urban zone about 20km east of downtown Haikou, the island’s capital.

Clutching business licenses, they besieged staff with questions about how to establish operations in the industrial estate. Though the area is pockmarked with abandoned construction sites some strewn with concrete fragments and steel rebar jutting into the air rapid development is on the horizon.

Thirty years ago, the land beneath their feet was slated to be a horse racing track, but today it is central to Beijing’s plan to turn the tropical island into a free-trade port that could one day rival Singapore or Hong Kong.

“Changes are taking place. There are more and more companies coming to register in Hainan recently,” said Wang Jing, chair of a construction supervision company in Haikou. “Hainan has wanted to take off in development so many times in the past, but the final results were not very good.”

President Xi Jinping announced in 2018 that the island, a popular holiday destination sometimes referred to as China’s Hawaii, would be made into the nation’s largest free-trade zone. But it was not until June last year that more details were unveiled.

The 35,000 sq km island would be turned into a “free-trade port” and duty-free shopping mecca by lowering taxes, relaxing visa requirements and loosening restrictions on capital flows and data by 2035, the government said.

The June announcement was widely interpreted as a shot against Hong Kong, as it coincided with the imposition of the controversial national security law in the city after months of anti-government protests. However, schemes to transform the southern province are not new.

Two previous national-level strategies failed to meet expectations, dashing the hopes of locals who wanted to see the island’s economy turned around.

But Wang, who arrived on the island to start a business in 1992, said this time around things appeared to be different.

“It looks like [authorities] seriously want to make a difference,” said Wang, who is in his 60s.

In the latest of a rapid fire series of policy pronouncements on the project, the central government in late April rolled out 28 new measures to further liberalise trade in goods and services in Hainan, including setting up a bureau to address the inevitable trade frictions that will crop up as the project develops.

Earlier in the month, the State Council, China’s cabinet, gave the green light for a trial programme to open up the island’s service sector over the next three years.

The country’s financial regulators have also announced new policies for Hainan, including making it easier to convert the yuan and market access for foreign investors.

Wang said his company had already started to receive more orders for construction project supervision, with more funding and people arriving on the island to do business.

“Basically there are two kinds [of projects]: infrastructure like bridges and roads, and office buildings,” he said. “The province is aiming to become a magnet for corporate headquarters.”

The business environment and government efficiency have also improved significantly in the past year, Wang said. When he registered a subsidiary in Haikou last year, he found that local authorities had cut red tape and moved many procedures online during the coronavirus pandemic.

To attract talent and financing, the province lowered 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 level in Hong Kong, according to the master plan released last year.

In the first quarter of 2021, some 412 new companies, each with registered capital of more than 10 million yuan (US$1.5 million), set up shop in Jiangdong New Area, an increase of 212 per cent from a year earlier, according to official data.

The island also appears to be winning over travellers, who are keen to soak up the sun and splurge on an increasing array of duty-free shopping.

Chinese travellers queuing in front of stores selling luxury brands such as Gucci, Cartier, Coach and Chanel used to be a common scene for the Harbour City shopping centre in Hong Kong. But many of those travellers are now visiting the 70,000 square-metre (753,473 sq ft) Sanya Begonia Bay International Shopping Centre.

“There are so many people lining up at the door every day. It’s been like this since the Lunar New Year,” said a shop assistant at the Gucci store, referring to the holiday period in February.

The shopping frenzy was unleashed in part by Beijing’s decision last July to triple the annual limit for Chinese citizens’ duty-free purchases in Hainan to 100,000 yuan (US$15,442) per person, up from the previous cap of 8,000 yuan for every single product.

Hainan’s offshore duty-free sales rose 416.6 per cent to 15.39 billion yuan in the first quarter of this year, after an annual rise of 103.7 per cent in 2020, even amid the disruption of cross-border travel due to the pandemic, according to customs data.

Some 250km away from the Sanya complex, a new international duty-free shopping centre is under construction on the west side of Haikou. When it opens next year, it will be the largest duty-free mall in Asia, twice as large as the Sanya mall.

In anticipation for future demand, Cainiao Network Technology, the logistics unit of Alibaba Group Holding which owns the South China Morning Post has established a 3,000 square metre (32,291 sq ft) underground storage facility in downtown Haikou, which holds more than 200,000 products, mostly cosmetics and electronics.

Chen Jingfeng, the manager of the warehouse, said the inventory is expected to increase to about 500,000 items, because the duty-free shop they work with plans to expand.

The rush of activity is a promising start for the free-trade port, but it belies the failures that have plagued previous major development efforts.

In 2010, China launched a programme to transform Hainan into an “international tourism island”. Before that, in 1988, the island separated itself from Guangdong province with plans to build the country’s largest special economic zone. Both failed to meet expectations they would boost the economy.

The island is still an economic backwater in China relative to its size. Hainan’s gross domestic product (GDP) accounted for a mere 0.54 per cent of the Chinese economy in 2020. But the provincial government has bold plans, setting a growth rate of 10 per cent for this year, up from a target of about 6.5 per cent from last year.

“The central authorities provided good policies before, but Hainan failed to make good use of them,” said Zhu, a former official on the management committee of the Yangpu Economic Development Zone in Hainan, who gave only his surname.

The Yangpu zone was another development project that failed to take off. Established in 1992, it was supposed to be a cutting-edge, export-oriented industrial area focusing on advanced technology and service industries. But Zhu said “many measures were done blindly and divorced from reality”.

As a result, the local community saw few major benefits, according to Zhu. Though in its infancy, the same can be said about Beijing’s latest free-trade port plan.

“Voices behind the free-trade port are loud, but nothing big has happened in actual fact,” said Zheng Yongnian, acting dean of the School of the Advanced Institute of Global and Contemporary China Studies at the Chinese University of Hong Kong, Shenzhen.

He said plans to build a “second customs line”, which will allow goods that have had 30 per cent value added on the island to enter the mainland duty free, will be sharply diluted by the signing of the Regional Comprehensive Economic Partnership (RCEP).

The free trade deal between China and 14 other Asia-Pacific nations will eventually abolish tariffs on more than 90 per cent of merchandise trade.

While there is no mention of Hong Kong in the free-trade port’s master plan, it is clear Beijing is looking to replicate some of the policies that made the city successful.

“Hong Kong’s rules are already global, having been in place for over a century,” Zheng said, speaking on the sidelines of the Boao Forum in late April. “Why not just directly carry out Hong Kong’s rules in the free-trade port, then it can immediately pose strong competition to Singapore it would save a lot of time compared to exploring rules by ourselves.”

He added that “if Hainan and Hong Kong collaborate, both will be stronger.”

In 2017, Beijing dispatched Shen Xiaoming to serve as Hainan’s governor and, in November, he became Communist Party secretary for the province. He previously ran Shanghai’s successful free-trade zone, helping persuade electric carmaker Tesla to set up its first overseas car assembly plant there.

“The key is the courage and vision of the provincial leaders,” Wang said. “The policy package this time has many pragmatic elements and it would be a waste if they failed to leverage them.”


Category: China

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