Hainan’s Free-Trade Port Will Form China’s Major Strategic Guarantee Zone

Hainan’s Free-Trade Port Will Form China’s Major Strategic Guarantee Zone

Guo Liqin & Xu Huiyun

Date: Mon, 04/16/2018 - 21:03 / source:Yicai
Hainan’s Free-Trade Port Will Form China’s Major Strategic Guarantee Zone
Hainan’s Free-Trade Port Will Form China’s Major Strategic Guarantee Zone

(Yicai Global) April 16 -- After the 30th anniversary of Hainan’s founding as a province and special economic zone of China, it is now being rebranded as a free-trade port, a new identity it has been granted in addition to two existing identities, namely China’s largest special economic zone and the only provincial international tourism island.

The CPC Central Committee and the State Council issued a joint document on April 14 that clearly laid out the timetable for the establishment of a free-trade port in Hainan.

Significant progress will be made in the construction of the pilot free-trade zoneand its international openness will improve significantly by 2020. The free-trade port system will be preliminarily established, and its business environment will be first-class in China by 2025. Its operating model and system will be more mature, and its business environment will reach a world-leading level by 2035.

Strategic guarantee zone

Why did the central government choose Hainan as a free-trade port construction site since it is a province with a relatively backward economy, an imperfect industrial structure, and the lack of a demographic dividend?

The concept of ‘free-trade port with Chinese characteristics’ must be stressed above all, said Wei Jianguo, former deputy commerce minister and vice president of China Center for International Economic Exchanges. This is not only because Hainan is far larger than any major existing free-trade port in the world and supported by the vast hinterland of mainland China, but more importantly, because of its strategic position, which is expected to form the mainstay of China’s security in the Asia-Pacific and the South China Sea regions.

The central government chose Hainan as a free-trade port not just for economic reasons, Wei noted, adding that it is necessary to grasp the meaning of the ‘National Major Strategic Service Guarantee Zone.’ The core idea of this concept is to solidify China’s presence in Southeast Asia, the South China Sea and the world to facilitate the country’s trade and exchanges with ASEAN and other countries.

The establishment of the free-trade port should have the strategic aim of responding to the US Indo-Pacific strategy and invigorating the South China Sea economy, forming a second-mover advantage for Hainan to compete with Taiwan, said another expert, who requested anonymity.

The free-trade zone is a pilot site, which controls goods, strives for free flow, fosters replicable and scalable experience, and is basically administered by China Customs, Wei told Yicai Global. The free-trade port is under the state’s direct supervision.

A free-trade system

Another important task of the zone is to form a free-trade port policy and institutional system in practice.

To build an institution and policy system for the free-trade port is to focus on zero trade barriers, free flow of cross-border funds, free flow of personnel and opening of the whole service industry, Chen Bo, executive director of the Free-Trade Zone Research Center, Huazhong University of Science and Technology School of Economics, told Yicai Global.

Hainan’s free-trade port must devise an institutional system of ‘Within National Territory but Outside Customs Territory,’ said Yan Wei, vice president of Shanghai Maritime University.

Foreign experience indicates, a high-standard free-trade port can play a demonstration role and lead a country or region to develop a new source of growth, Yan said.

The building of a high-standard free-trade port can lead China to participate in and guide the formulation of international rules in trade, investment, finance, and law, and create a more stable, transparent and predictable trade and investment environment, eliminating the commercial barriers faced by the country and enhancing its global resource allocation capabilities, he added.

Considering that the relatively typical free ports such as Hong Kong, Singapore, Rotterdam, and Dubai are not dominated by tourism, the building of a free-trade port in Hainan will need constant exploration and breakthrough, Chenbelieves.

Tourism, services, hi-tech dominate

Hainan’s development has relied on the construction of a local special zone which focuses on elder care and real estate, while sectors like economy and trade, finance, science and technology and education are excluded from the reform mainstream, but this will change with the free-trade port.

The CPC Central Committee-State Council policy document sets a clear orientation for Hainan to develop tourism, modern services and high technology as mainstay industries, rather than solely fixing its eyes on the transport trade, processing and manufacturing, as in the past.

China is undergoing a profound industrial structural transformation, and against this backdrop, it is not a good choice for Hainan, a province with such a weak industrial foundation, to stick to traditional manufacturing, Yan She, an associate professor at Guanghua School of Management at Peking University told Yicai Global.

Although Hainan has achieved rapid economic growth over the past 30 years, its manufacturing sector lacks comparative advantages, and the gap between it and other coastal developed provinces remains the same or even wider than before. For instance, the per capita GDP of Hainan last year was nearly CNY50,000 (USD8,000), 60% of that of neighboring Guangdong province, virtually unchanged from 30 years ago.

As China entered the period of manufacturing upgrade and service industry expansion, Hainan gained certain comparative advantages and favorable external conditions. "The next 30 years will be Hainan’s substantial growth period," Yan predicted.

Though Hainan has no comparative advantages in manufacturing, its natural conditions and resources do have an edge in tourism, leisure, retirement, sports and the maritime sectors, he noted.

The free-trade port will encourage the research, development and application of new medical technologies, new equipment and new drugs, and work out a facilitation policy to support the treatment of overseas patients in the pilot area, Wei said.

Overseas doctors will not need visas to come to Hainan to practice medicine. New drugs for treating difficult diseases can be trialed in Hainan if patients are willing to assume the risk, Wei said.

With China’s market access for foreign investment, intellectual property rights and other issues of general concern to international investors, Wei believes that they will entertain better expectations and that Hainan will attain a higher level of openness than other such zones.

Editors: Ben Armour

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Keywords: free-trade port, HAINAN, government policy, insider analysis