According to the South China Morning Post , on June 1, Beijing outlined a plan to turn 35,000 square kilometers of Hainan island into a "free trade port". Measures taken will include reducing income taxes for certain individuals and companies to 15% and easing visa requirements for tourists and businessmen.

China is expected to make Hainan a center of "strong international influence" by the middle of the century. The island of 9.5 million people will enjoy the freedom of trade, investment, capital flows and the movement of people before 2035.

China’s ambition

Hainan is like Hawaii of China and has an area 30 times more than Hong Kong . According to the Chinese government’s statement, the project turned Hainan into a regional trade, shopping and transportation center, which was "planned, organized and promoted by President Xi Jinping himself."

Earlier, in April 2018, the Chinese President announced that he would build Hainan as the country’s largest free trade area. The Hainan government has sent delegations to Hong Kong, Singapore and Dubai to learn and research more about free trade activities.

The detailed plan of China was launched in the context of escalating US-China tensions in many areas. Last week, the US planned to revoke special trade preferences with Hong Kong after Beijing moved to apply the new national security law to the financial center .

If special trade preferences are withdrawn, Hong Kong’s exports will be subject to the same tariffs as the United States imposes on mainland Chinese goods. This threatens Hong Kong’s port operations and re-export businesses, which benefit from low taxes with the US.

Without mentioning Hong Kong or Singapore, it is clear that Beijing is seeking to replicate some of the policies that have been successfully applied to these cities, including the income tax limit of 15%, close to 17% in Hong Kong and much lower than the rate in mainland China, the South China Morning Post said.

Under the plan, certain imported goods such as manufacturing equipment, vehicles, ships, aircraft, raw materials and consumer goods will be exempt from taxes.

Each year, a Chinese citizen will be able to spend up to US $ 14,000 at duty free shops on the island, up from the current US $ 4,200 .

China will build a "second import tariff line" for products shipped from Hainan to the mainland to exempt the products that have been subject to 30% value added tax on the island.

Investment approval procedures in the province will also be streamlined. In certain areas, businesses only need to commit to comply with the regulations before starting operations, not required to obtain a license from the government.

Foreigners can act as legal representatives for state-owned enterprises. Visitors to Hainan by international cruise ship will be allowed to stay on the island for up to 15 days without a visa.

Hainan will become the second Hong Kong?

The range of policies proposed for Hainan is much wider than the measures Beijing is applying to other free trade areas such as Shenzhen or Shanghai.

However, the plan lacks policies to loosen capital accounts and control the flow of information, which are the key elements of a true free trade center.

Steve Tsang, director of the SOAS China Research Institute in London, said Xi’s plan for Hainan could be hampered by the current international atmosphere and the lack of legal regulations on the island. He said that the island province "could not be turned into the second Hong Kong" because "Hainan did not have all the factors that made Hong Kong".

"Hainan cannot turn into the second Hong Kong". Photo: South China Morning Post.

In 1988, Deng Xiaoping, a former Chinese leader, decided to lift Hainan into an independent province and turn the island into China’s largest "special economic zone." The decision was made in the hope that Hainan could repeat some of Shenzhen’s successes, from a small fishing village to a high-tech development center.

However, instead of developing, Hainan quickly turned into a paradise for real estate smuggling and speculation in the early 1990s. This is one of the biggest economic failures for Beijing since economic reforms in the late 1970s.

According to statistics, in 2019, Hainan’s GDP was only 74.6 billion USD, accounting for 0.5% of total national GDP. Financial revenue of the province in 2019 is 1/7 of Shenzhen. Per capita income in Hainan is 10% lower than the average in China.

In the plan for Hainan, policies to reduce the risks of public health and the environment account for a large amount. These measures are designed to prevent the negative consequences that may arise from promoting trade and investment.

Import of solid waste is banned in Hainan. The Chinese government requires the island province to balance the more open investment environment. At the same time, the Hainan government must take measures to prevent national security risks, such as security checks for foreign investors.

Earlier, experts speculated that Beijing could allow Hainan to develop its racing and gambling industry, competing with Hong Kong and Macau. However, the plan does not address this issue.