The tropical Hainan free trade port will have the highest degree of openness in the world. 32 years ago, Hainan was established by the Chinese government. It was later designated as a special economic zone to attract foreign investments with preferential tax rates. In 1992, Hainan established an economic zone that was to be fully developed by foreign investors. Later on, China took a visa on arrival approach within Hainan to promote the attraction of possibilities for foreign investment. For decades, Hainan has had the foundation of a special economic zone in place. This made it a prime candidate to become a free trade port. In 2018, a pilot free trade zone was established to test the waters to see how a free trade port would operate on the island. 2 years later in 2020, the official master plan was announced to turn Hainan island into a truly open environment at the highest level.
China will build Hainan into a free trade port on the frontline of the country's integration into the global economic system. This financial powerhouse will open with zero tariffs and preferential policies for foreign investment are also planned for the coming years. Even so, one question remains, how can Hainan compete with other free trade zones and financial centers in China? Will it be a direct competitor with Hong Kong and what impact will it have on Chinese reform?
China has had several free trade zones before. Hainan is only one of 18 places within China. One critical difference between Hainan and the others is that Hainan will be what's known as a free trade port, not a free trade zone.
But what is the difference between free trade zones and free trade ports?
As the first-ever free trade port, Hainan will allow the gradual cross border flow of capital. Additionally, those residing more than 181 days in the country will only pay a 15% personal income tax. This comes in addition to an easement of taxes for modern services, tourism firms, and duty-free goods.
Hainan has been given such good and flexible policies that if implemented correctly, have the potential to be the most favorable free trade ports in the world for foreign investors. Therefore, it is competing with both Singapore and Hong Kong, or is it? The very important question is how do you implement those policies in terms of attracting talent and in terms of attracting a bilingual working population? These are two critical necessities that must be addressed if Hainan is to be implemented to perfection.
If the new free trade port wants to attract foreign investors, then the business must be done in the language of business, English. Many scholars and economists are asking the question, how can this be done while also ensuring that Hainan does not become another manufacturing hub or property bubble?
Hainan is lucky in terms of its flexibility given from Beijing. The central government is remaining proactive and trying to properly predict the challenges that await city officials during the implementation phase.
China has many free trade zones, what lessons can China learn for the implementation of Hainan?
The Hong Kong free trade zone has been in place for several years. It takes experience, something that China already has, to properly implement a project on the scale of Hainan. Many experts say that yes, Hainan will be a direct competitor with Singapore and Hong Kong. While Beijing says not, it won’t compete, others say it will take more than 10 years to become a direct competitor on a global scale. However, it remains to be seen how much time will be required to successfully implement the policies China has in store.
If you look at the Shanghai free trade zone, one critical part is the financial system. Within the Shanghai free trade zone, the idea is that investors and firms in the zone are directly connected to the global markets. However, outside the zone, in the rest of China, there is what you would call a direct wall preventing firms and investors from engaging with the global economy. This is one lesson learned that must be applied to Hainan for a successful implementation.
When taking examples from the Shanghai free trade zone, you’ll notice that you can engage in virtually any transaction with global participants. When you look at the trading volume, it is limited by Beijing for several reasons. Also, Shanghai already has a relatively advanced economy. For this reason, Hainan provides a brand new opportunity because rather than just a tiny section of the city as we see in Shanghai, the entire island of Hainan will benefit from the free trade port policies.
In that sense, this is a brand new 100% attempt. At the moment, Hainan doesn't have a very developed economy like the other free trade zones. With no developed economy and an underdeveloped healthcare and education sector, change will come, but slowly. It's not designed to simply be a tax haven. The central government is starting from scratch to design a new system that has never been attempted before. Therefore, in 10 to 15 years, we will see the impact that Beijing's policies have on the overall economy. Will the island of Hainan be converted into a burgeoning bilingual economy that competes on a global scale? Economists say that only time will tell.
How much potential does Hainan have as a financial powerhouse?
The whole island is considered a free port. The first 5 years will consist of building the foundation. Once the infrastructure is set up, the entire island will officially become a free trade port. Then, all the investors, Chinese companies, and global companies will be able to connect to the entire world. The financial system on the island will be one that is open to anyone with the capacity to do business there.
That means all the payment applications we utilize in the United States will be available in Hainan. This opens the door for local Hainan retailers of wholesale chinese products to theoretically work with foriegn financial firms to seek investment, finance and more.
While still excluded from mainland China, they will be open for use in Hainan. You can imagine that transactions will be done in RMB, USD, EUROS, and any other currency.
The other crucial part is that while Hainan will have an open financial system, how it connects to other parts of China will also be important. Places like Shenzhen and the Chinese bay area will need to have a seamless connection with Hainan. Therefore, keeping Hainan open to the rest of the world and then limiting its financial abilities when trading with the rest of Mainland China will require tricky implementation.
Regulatory agencies will have to monitor transactions to control risk and finance professionals will have to operate within the island to keep things flowing like water. You can imagine that the volume of transactions will go up quickly. Therefore, Beijing must remain very hands-on to ensure that a large portion of the transactions, professional services, legal firms, accounting firms, and the entire establishment of the system functions as a whole.
How will Beijing manage the influx of foreign talent compared to training local talent?
Many professors and Chinese economists estimate that if Hainan is to become a free trade port as efficient and lucrative as Shanghai, they will need more than 1 Million bilingual financial professionals living and working in the island. As an Island of 10 million people, what is the plan for attracting foreign talent while training the local workforce?
There have been no plans outlined in Beijing's documentation relating to this. Therefore, one can assume that this will only come as a result of proper implementation. One key thing to remember is the impact this free trade port will have on the local economy. If the majority of Hainan residents don't speak English, then they will either have to learn or new talent will be brought in. If the ratio between new talent and local residents becomes skewed, Beijing will have more problems arising from the frustrations of local residents. Therefore, it will be a careful balancing act between training local talent and bringing in bilingual financial professionals from places like Hong Kong, Shanghai, and Singapore.
Beijing's Official statement says Hainan will not compete with Hong Kong but do experts agree?
For the next 5 to 10 years, it will be too difficult for Hainan to compete with Hong Kong, and Shanghai. Hong Kong and Shanghai have millions of professionals that have been working for over 20 years. You cannot realistically expect Hainan to instantly start competing with Hong Kong and Shanghai. It will be a process that will take time. Building up national and international credibility will take decades. At this critical time, the focus is on building up the infrastructure of Hainan. Before we start to think about how Hainan can compete with Hong Kong and Shanghai, it is imperative to take a step back and think about how long it took Hong Kong to get where it is.
Hong Kong was certainly not built overnight. Additionally, Hong Kong’s strong track record of integrity will take decades to surpass. It is a key financial center in the world, shopping haven, and financial services center. In the long run, Hainan can surpass Hong Kong. However, it's not a zero-sum game. The Chinese economy is still growing and is currently the second-largest in the world. The largest trading partner of China is still Asian countries like Japan, Korea, and Southeast Asian countries, not the US. Therefore, as long as this continues, you can expect more free trade ports like Hainan to open up. The Asian economy is growing rapidly. Realistically, you can expect more and more free trade ports to open up without pulling businesses away from Hong Kong.
The Asian economies are the fast-growing economies in the world. Therefore, it's not a zero-sum game. The numbers are continually rising and multiple free trade ports can be enacted to take advantage of those growing economies around the Asian continent.
What Areas Of Hainan Will Grow The Fastest?
Modern services, internet companies, and professional services show great promise to be able to quickly compete on a global scale within ten years. Education and healthcare in Hainan still lag far behind the global world. Therefore, it will take time for these sectors to be built up to the level of Hong Kong and Shanghai. Even so, the competition from other Chinese cities and free trade zones already have a head start. With help from Beijing, modern services, internet companies, and professional services have the potential to scale the fastest. It depends on how well the central Chinese government will implement things as time passes.
Leadership, governance, and lessons learned from other FTZ’s will shorten the learning curve and will be the biggest asset in cutting down the time necessary to achieve the objective. It will require a high degree of transparency that eliminates any form of local corruption or unscrupulous practices. It took Singapore 20 years to get where it is today. Therefore, the learning curve for Hainan will be less steep.
In conclusion, many experts, economists, and even Beijing officials clearly believe that only time will tell. Tying Hainan into the one belt road initiative will be a large driving force that determines how quickly Hainan will get off the ground. As we discussed earlier, it took 20 years for Shanghai to become what it is today. With the coming BRI, we can expect great things to happen for Hainan. It is certainly an interesting time to be from the island and many locals as well as global investors are excited for what is to come. Whether you are a wholesale Chinese manufacturer or a retailer of imported goods, the Hainan free trade port holds great promise for you.
