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:
| Important Documents Issued by Central Government Departments and Their Salient Points | ||
| Department | Title and issue date of document | Salient points |
| National Immigration Administration | National Immigration Administration Announcement 18 April 2018 | • Starting from 1 May 2018, a visa-free policy will apply to visitors from 59 countries/regions. Tourists arranging trips via travel agencies in Hainan can enter the province visa-free and can stay there for up to 30 days |
| Ministry of Transport | Plan of the Ministry of Transport for Implementing the Guiding Opinions of the CPC Central Committee and the State Council on Supporting Hainan’s Comprehensive Deepening of Reform and Opening Up 25 July 2018 | • Accelerate the construction of a batch of major transport infrastructure projects, and look into the possibility of building the Qiongzhou Strait passage • Fully replicate the free trade zone maritime freight policy and let Hainan take the lead in fully opening up to the outside world in terms of international maritime transport • Introduce a preferential policy for maritime transport taxation • Implement an innovative cruise and yacht management policy, and promote the establishment of an international tourism and consumption centre |
| Supreme People’s Court | Opinions of the Supreme People’s Court on Providing Judicial Services and Safeguards for Supporting Hainan’s Comprehensive Deepening of Reform and Opening Up 1 August 2018 | • Encourage Hainan to strengthen its judicial powers • Support the creation of a diversified international commercial dispute settlement body |
| Ministry of Finance | Implementation Plan for Financial and Tax Policies Supporting Hainan’s Comprehensive Deepening of Reform and Opening Up 11 October 2018 | • To support Hainan’s spending on infrastructure construction and economic restructuring, government funding allocated to the province will be increased for five consecutive years starting from 2018 in order to reduce the provincial government’s reliance on real estate • Where risks are controllable, greater support will be given to local governments taking on new debt, while at the same time encouraging them to develop innovative financial measures, such as encouraging Hainan to set up a free trade port construction investment fund |
| State Administration for Market Regulation, National Drug Administration, National Intellectual Property Administration | Several Opinions of the State Administration for Market Regulation, National Drug Administration, and National Intellectual Property Administration on Supporting the Establishment of the China (Hainan) Free Trade Zone 15 November 2018 | The Hainan FTZ will: • Revamp the business registration system and streamline the enterprise registration procedures • Build a quality assurance mechanism, such as a green standard system • Pursue risk regulation system innovation, e.g. imposing credit constraint on businesses which have seriously broken the law. Meanwhile, the inspection process will be improved to reduce disruption to normal business activities • Advance the establishment of a fair market environment • Improve intellectual property protection |
| Ministry of Human Resources and Social Security | Implementation Opinions on Supporting Hainan’s Comprehensive Deepening of Reform and Opening Up in Human Resources and Social Security Sector 27 November 2018 | The Hainan FTZ will: • Proactively implement the employment and entrepreneurship policy and “talents first” strategy • Steadily raise the level of social security |
| Ministry of Finance, General Administration of Customs, State Administration of Taxation | Announcement on Further Adjusting the Duty-free Shopping Policy for Outward-bound Travellers from Hainan 27 November 2018 | • The cumulative per person per year duty-free shopping limit on outward-bound travellers from the island (including local residents) has been raised to RMB30,000 from 1 December 2018 |
| Ministry of Agriculture and Rural Affairs | Plan of the Ministry of Agriculture and Rural Affairs for implementing the Guiding Opinions of the CPC Central Committee and the State Council on Supporting Hainan’s Comprehensive Deepening of Reform and Opening Up 7 December 2018 | • Help implement the plan to build the National Nanfan Scientific and Research Breeding Base (Hainan) • Support the development of the National Tropical Agriculture Science Centre and National Modern Agriculture Base • Support the establishment of the South China Sea Fishery Resources Development and Conservation Area • Promote the opening up of Hainan’s agriculture to the outside world |
| National Development and Reform Commission | Circular of the National Development and Reform Commission on Issuing the Implementation Plan for Building Hainan into an International Tourism and Consumption Centre 12 December 2018 | • Support the development of an international tourism island • Explore the development of a consumption-led economy by encouraging tourist consumption |
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.
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.
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):
| Comparison of Market Access Liberalisation Measures under the Overall Plan and CEPA Agreement on Trade in Services | ||
| Overall Plan | Sector | CEPA |
| Restriction on foreign equity ratio in the provision of multi-party communications services, internet access services for online users, and store-and-forward services in the mainland will be lifted | Telecommunications | Hong Kong service suppliers are allowed to set up equity joint-venture or wholly-owned enterprises in the mainland to provide multi-party communications services, internet access services for online users, and store-and-forward services, with no restriction on the equity ratio of the Hong Kong party |
| Foreign investors will be allowed to invest in IP-based virtual private network services in the mainland, with equity ratio not exceeding 50% | Hong Kong service suppliers are allowed to set up equity joint-venture enterprises in the mainland to invest in IP-based virtual private network services in the mainland, with the equity ratio of the Hong Kong party not exceeding 50% | |
| Foreign investors will be allowed to set up foreign-invested performing arts groups (with the Chinese party as the controlling shareholder) | Cultural | Hong Kong service suppliers are allowed to set up equity joint-venture performing arts groups in the mainland, with the mainland party as the controlling shareholder |
| Foreign professionals, who have obtained a class 1 registered architect or class 1 registered structural engineer qualification, will be allowed to act as partners to set up construction and engineering design offices in accordance with the relevant qualification requirements | Construction | Hong Kong professionals, who have obtained mainland's class 1 registered architect or class 1 registered structural engineer qualification, are allowed to act as partners to set up construction and engineering design offices in the mainland in accordance with the relevant qualification requirements |
| Restriction on foreign equity ratio in life insurance companies will be relaxed to 51% | Insurance | Foreign insurance companies can set up equity joint ventures with mainland enterprises, with the equity ratio of the foreign party not exceeding 50% of the joint venture’s total capital investment |
| Restriction on foreign equity ratio in international maritime transport companies will be lifted | Maritime transport | Maritime transport services (passengers and freight) are restricted to equity joint ventures and the capital contribution of the Hong Kong service supplier may not exceed 50% |
| Restriction on foreign equity ratio in international shipping agency companies will be lifted | Freight forwarding | Provision of third-party international shipping agency services is restricted to equity joint ventures and the equity ratio of the Hong Kong service supplier may not exceed 51% |
| Restriction on foreign equity ratio in projects involving the selection of new species of vegetables and seed production will be lifted | Agriculture | In projects involving the selection of new species of crops and seed production, the mainland party shall be the controlling shareholder |
| Source: Overall Plan, Hong Kong Trade and Industry Department | ||
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.
