The advantages offered by Hainan may be more than meets the eye

(the Hainan Free Trade Port)

"Hainan Island is on fire," John Idol, CEO of Capri Holdings (owner of the Michael Kors and Versace brands), told analysts on a recent earnings call. "Hainan is a strategic priority for us. Every business is looking at it," said Patrice Louvet, CEO of Ralph Lauren.

Long recognized around the world for its pristine beaches, beautiful scenery and golden sunsets, Hainan has recently also become a leading destination for Chinese consumers, seeking the world's top luxury goods and luxury brands around the world have taken notice.

But it is not just luxury consumer brands that are excited about Hainan.

In June 2020, the Chinese government released an ambitious plan to transform this tropical paradise into one of the world's leading free trade ports (FTPs), which would be on par with Hong Kong, Singapore and Dubai. This plan or master plan, formally known as the Overall Plan for the Construction of Hainan Free Trade Port, is based on zero tariffs, low tax rates, a simplified tax system and an enhanced legal system. Specifically, it mandates a two-stage process for Hainan to create and implement an independent tariff regime for a wide range of imports that may also include exclusions from import VAT and consumption tax. Moreover, to promote Hainan's integration into global supply chains goods can be imported tariff free into Hainan, processed and then sold elsewhere in China tariff free as well. While Hainan's population, over 10 million, is slightly larger than Hong Kong's or Singapore's, its area of 35,000 square km is thirty times that of Hong Kong, which gives it more than ample space for development and growth of high end industries.

The Hainan FTP also provides low corporate and individual tax rates at 15%, which compares favorably with leading FTPs such as Hong Kong, Singapore and Dubai. These rates are also lower than the standard corporate income tax rate of 25% and the marginal individual income tax rate of 45% in China. As such, many businesses and highly skilled professionals will find the FTP an appealing place to call home.

But the master plan calls for Hainan to be more than just a traditional FTP. Instead, it intends for the island to become a strategic trade and investment destination with fully liberalized cross-border flows of not just trade and investment but also personnel, transport and data with 2050 as the year this objective is fully realized.

As businesses and society transition completely to digitization, the telecommunications and financial services industries are two of the most important to attract, foster, and support. Not surprisingly, these two sectors are prioritized in the master plan with policies that include the elimination of restrictions on the percentage of foreign ownership and permission to offer basic telecommunication services and other groundbreaking initiatives.

Moreover, the master plan also focuses on education by allowing overseas universities and vocational colleges focused on STEM (science, technology, engineering and math) as well as agriculture and medicine to open branch schools independently. It also builds on Hainan’s strengths as a tourism destination by creating a pilot zone for the cruise industry, attracting yacht owners, and allowing foreign airlines more business opportunities including expansion of fifth freedom and support for seventh freedom rights.

Simply put, the fifth freedom is the right of an airline to fly between two foreign countries when the flight is originating or terminating in its home country, which just means flying between two foreign countries as long as it’s part of a larger route from or back to its home country. An example of a fifth freedom flight might be Air China flying from Beijing to London to New York. Passengers could fly London to New York on this flight that originated in Air China’s home country. Meanwhile, seventh freedom rights permit an airline to fly between two countries that are not its home country. These two freedoms not only allow airlines to use their planes more efficiently and profitably but also give consumers more choices. As such, it is likely to be a powerful catalyst for the next stage of Hainan’s development.

Given Hainan’s proximate to ASEAN, the development of the telecommunications, financial services, and aviation sectors are of strategic importance not only to China but the region. ASEAN is comprised of the following countries: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. These countries have a total population of 650 million people and a combined gross domestic product (GDP) of $2.8 trillion and the ASEAN region is one of the fastest growing and most dynamic regions in the world.

With the signing of RCEP, which not only includes the ASEAN states but also Australia, China, Japan, New Zealand, and South Korea, this region has assumed even great commercial and strategic importance since its 15 member countries account for about 30% of the world's population (2.2 billion people) and 30% of global GDP ($26.2 trillion) as of 2020, making it the biggest trade bloc in history.

Thus, the Hainan FTP will not only be a platform for foreign businesses seeking access to China’s vast and rapidly growing domestic market but it will also be a key regional hub in one of the most dynamic regions of the world.

However, there has been some skepticism about whether Hainan can fully realize these ambitious goals before 2050.

First, some analysts believe that replicating the success of Hong Kong may take a very long time. However, Singapore was able to duplicate many of the advantages of Hong Kong in a much shorter time frame. According to Lee Kuan Yew, the most important factor is a strong and capable government that follows a clear plan. Given the track record of China’s government from its response to the global financial crisis of 2008 to the recent COVID pandemic, there is little question about the strength and competence of China’s government. The key issue with respect to Hainan FTP is the rate at which local government can seize and carry out this historic opportunity.

Second, fully realizing the objectives of the master plan will require an infusion of world-class talent. In a digital era, the most important productive resource is a motivated, talented and creative workforce. The master plan calls for attracting talent through various means and this is the vital component that has to be accomplished.

The final challenge is geographic. Hainan is an island that is currently accessed by sea and air, both of which can be subject to inclement weather. Some have called for building a tunnel to connect Hainan with the mainland. This type of physical infrastructure along with further infrastructure development on the island can play a major positive role in accelerating the development of the Hainan FTP.

Hainan becomes known first as an idyllic holiday destination before becoming a shoppers’ paradise. As the Hainan FTP master plan unfolds, it will become a vital location for the industries of the future and a hub for a region that is becoming the economic center of gravity for the world.  Patrice Louvet, CEO of Ralph Lauren, is right in that Hainan is a strategic priority but not just for luxury retail but for China, ASEAN, and even the world.

Author: Andy Mok, Senior Research Fellow at the Center for China and Globalization; CGTN commentator on technology and international affairs