Chinese Hainan will get its Free Trade Zone

Today’s TextileFuture Newsletter is concentrating on the new to be Free Trade Zone in Chinese Hainan. We do thank the Hong Kong Trade Development Council’s Research arm for the complete breakdown of the development.

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 April 11, 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:

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:

    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.

    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.

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

    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:

    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.

    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.

    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.

    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.

    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.

    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:

    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.

    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.

    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.

Notes:

[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

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Hainan Free Trade Zone (2): Preferential Policies and Business Opportunities

A Central Government-Led Initiative

The Hainan Free Trade Zone (FTZ) is expected to play a major role in the Chinese government’s development strategy, as the Overall Plan of the China (Hainan) Pilot FTZ announced on 16 October 2018 makes clear. In order to facilitate this, the central government has set up a top-level body to shape and coordinate the policies of the various departments involved. The National Development and Reform Commission (NDRC) has put together the Hainan Leading Group for Deepening Overall Reform and Opening Up, under the leadership of State Council vice premier Han Zheng.

In recent years, the NDRC has been involved in setting up a number of high-level groups responsible for coordinating regional strategic development. Others include the Leading Group for the Development of the Guangdong-Hong Kong-Macao Bay Area, the Leading Group for the Coordinated Development of the Beijing-Tianjin-Hebei Region, the Leading Group for Advancing the Belt and Road Initiative, and the Leading Group for the Development of the Yangtze River Economic Belt, all under the leadership of Han Zheng.

This would suggest that the strategic importance of the Hainan FTZ is on a par with that of the Guangdong-Hong Kong-Macao Bay Area, Beijing-Tianjin-Hebei Region, Yangtze River Economic Belt, and the Belt and Road Initiative. However, it is also significant that the Hainan Leading Group for Deepening Overall Reform and Opening Up is the only one of these leading groups that covers only one province or region. This shows how important the establishment of the Hainan FTZ is to regional and national economic development.

Central Government Policy Moves

Since the central government promulgated the Guiding Opinions of the CPC Central Committee and the State Council on Supporting Hainan’s Comprehensive Deepening of Reform and Opening Up (also known as Central Document No. 12) on 11 April 2018, the central government departments involved have introduced a series of policies setting out the direction for the Hainan provincial government. As of January 2019, these include:

Provincial Government presses on with Reform

As China’s central government looks to streamline government functions and administration and delegate powers, the provincial government in Hainan is beginning to enjoy greater autonomy over the development of the FTZ. It has already introduced policies designed to improve the business environment in the province and open it up further to the outside world by 2020.

Among these policies is the provincial government’s Action Plan for Attracting 1 Million Talents to Hainan (2018-2025), unveiled in May 2018. It’s aimed at bringing in foreign talent of all kinds and strengthening training in the province. In June, measures to provide guaranteed housing for foreign talent and offering employment to their spouses were also introduced.

Another – announced in December 2018 — is the Action Plan of Hainan Province for Optimising the Business Environment (2018-2019), which expands the measures listed in the Overall Plan for the opening up of key industries, cuts the time required to register a new business to a maximum of three working days, and enlarges the programme for separating business licences from operation permits to 130 sectors.

The second batch includes an international school in Jiangdong New Area, Haikou, and an internet headquarters project, both of which are aimed at attracting foreign talent to work in Hainan and providing facilities for the internet economy. Meanwhile, work to upgrade duty-free shops in Haikou and Sanya Airport should be finished soon, which will allow Hainan to receive and attract more tourists.


In January 2019, the Ministry of Finance announced that Hainan will be allowed to issue additional bonds worth RMB16.6 billion in 2019. This will help the province guarantee financing for key projects such as poverty relief, pollution containment and transportation. The development of Hainan’s infrastructure is set to become a major focus of the province’s economic activity this year.

Opportunities for Hong Kong Companies

The Hainan FTZ will increase market access for foreign-funded services. The table below lists the measures on the liberalisation of market access for the services industry contained in the Overall Plan, compared to those offered by the Mainland-Hong Kong Closer Economic Partnership Arrangement (CEPA):


It can be seen from the table above that, in parts of the telecommunications, cultural and construction sectors, the Hainan FTZ will grant foreign investors the same market access as that currently enjoyed by Hong Kong companies; while in parts of the insurance, maritime transport, freight forwarding and agriculture sectors, the liberalisation measures go even further than those set out in CEPA. While these generous market access measures are likely to encourage more foreign investors to Hainan and thus intensify the competition faced by Hong Kong companies in the province, it may also encourage other mainland regions to open up further, which may in turn create more new opportunities for Hong Kong companies.

The Overall Plan specifically promotes an increased role for Hong Kong companies in the development of Hainan, stating that the pilot free trade zone has been authorised to formulate administrative measures for Hong Kong and Macao professionals, allowing practitioners in the financial, architecture, planning and patent agency service sectors who possess qualifications to practise in Hong Kong and Macao to provide professional services for enterprises in the pilot free trade zone upon filing records with the competent department. This clearly shows that the Hainan FTZ will grant special access treatment to Hong Kong and Macao residents. With the Hainan FTZ offering generous market access liberalisation measures to foreign investors, professionals in the construction, planning and patent agency sectors can expect to find development opportunities in Hainan.

At the same time, the Hainan FTZ is also set to liberalise its financial sector further. This will include measures such as expanding cross-border RMB settlements, reforming foreign exchange control, and exploring the feasibility of making currency conversion easier in investment and financing. Given that Hong Kong is the largest offshore RMB business hub in the world, Hong Kong companies should be exploring how they can provide financial services in the Hainan FTZ within its policy framework.

Hainan FTZ Opens up to the World

The Hainan FTZ is set to open up even further to the world through its development of tourism, new tech and hi-tech sectors and modern services, as well as by improving its business environment through adjustments to the relationship between the government and the market. At the Boao Forum for Asia on 10 April 2018, President Xi Jinping said, “China’s open doors will not close but will only open wider and wider.” The Hainan FTZ is the latest move China has taken to promote comprehensive, deep-level reform and “opening up”. As the FTZ launches more new policies and plans in the future with this aim in mind, continued attention should be paid to its development.

In January 2019, the Hainan Free Trade Account was launched, a convertible accounting system which uses RMB as its base currency. Clients can open an independent Free Trade Account with a number of financial institutions in the province, including the Hainan Branch of the Bank of China, and use it to convert their money between RMB and foreign currencies.

The provincial government also published documents promoting the development of the agricultural products processing industry, improving the ecological environment, and making examination and approval services easier to use, during the second half of 2018.

Work has also begun on the construction of infrastructure projects related to the FTZ. The first batch of projects includes the extension of the Hainan International Convention and Exhibition Center, designed to allow it to host large-scale international exhibitions, and the Sanya Science and Technology Complex, which is projected to become an internationally recognised first-class deep-sea science and technology innovation platform.

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