China passes law to make Hainan free trade haven

HANGZHOU, China — China moved forward with plans to turn the southern resort island of Hainan into a free trade hub, passing legislation Thursday to lower barriers to cross-border investment.

The law passed by the Standing Committee of the National People’s Congress provides a legal foundation for plans drafted last June to make Hainan a “free trade port.” Tariffs will be reduced to zero in principle by 2025, and businesses and individuals will receive tax breaks.

The government looks to make Hainan a center for foreign finance as well as a destination for Chinese shoppers, spreading out functions that had been largely concentrated in Hong Kong, though geopolitical risks and a shortage of talent could throw a wrench into these plans.

Authorities including the People’s Bank of China set out policies in April to open up the island’s financial sector. Certain foreign funds can invest in Chinese private equity products, as well as freely transfer capital into and out of the country within certain limits. Companies in Hainan can borrow or otherwise raise capital from foreign banks up to a higher cap.

The policies encourage Chinese investment abroad as well, reflecting a shift in priorities from preventing capital flight before the coronavirus to promoting the yuan as an international currency. Approved domestic funds will be able to invest in unlisted foreign equities, up to a $5 billion quota.

China, which wants to avoid becoming economically isolated amid ongoing friction with the U.S. and Europe, hopes to attract businesses and talent from abroad by further opening up finance and trade to outside players.

The government is also keen to leverage domestic demand, as tensions with Washington — which China expects to continue for some time — leave prospects for export markets in question. The reforms in Hainan aim to bring home demand that had been met abroad.

This includes medical tourism, a market that has been tapped by Japanese cities, among others. China is moving forward with plans for a medical tourism zone in Boao, spanning 20 sq. km and boasting 16 medical facilities.

Already open in the zone is a medical center that offers rehabilitation and other services for members. To keep long-term patients entertained, it features spaces for such arts as calligraphy and the tea ceremony, as well as a stage where patients can borrow clothes to put on fashion shows.

“It attracts well-off people from throughout China,” a representative said.

Hainan offers duty-free shopping for domestic travelers. (Photo by Yusuke Hinata)

Hainan serves as a testing ground for programs that will be brought to the mainland if successful. The government’s plan to make it a “clean energy island” calls for clean electricity sources to make up 85% of its generating capacity by 2030, and for sales of conventional gasoline-powered vehicles to end by that year.

The island could become a testbed for real estate policy as well. The finance ministry is considering implementing property taxes on a trial basis in multiple cities to rein in surging prices and stabilize local finances, and many experts see Hainan as a leading candidate.

President Xi Jinping’s administration has high expectations for Hainan, but a number of challenges remain, including a labor shortage.

“Our thin and weak labor base is a bottleneck for development,” Liu Cigui, then-party chief of Hainan, said last June.

The island draws Chinese travelers with duty-free shopping, partly displacing Hong Kong’s role as a top domestic shopping destination, but it still pales in comparison to Hong Kong as a financial hub.

And geopolitics pose a risk as well. The U.S. and Europe have hit China with sanctions over issues including its treatment of the Uyghur population, and China has passed legislation providing a legal basis for retaliation. If tensions escalate further, companies operating in Hainan could be caught in the crossfire.

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