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China's Master Plan for building Hainan Free Trade Port (FTP) is of significant importance and shows the country's resolve to turn its southernmost province into a free trade port – the first of its kind in the country. Going forward, it is likely to generate a huge impact on the Chinese economy and accelerate its integration with the world economy.

However, it is important to note that the country's ambition with Hainan did not just start this year. Back in 1980s, the island was designated a special economic zone. In 2018, Chinese President Xi Jinping announced the decision to turn it into a Free Trade Zone (FTZ), one of the country's 12 such zones as of 2018.

So what does the designation of FTP mean and why does it bear so much significance? According to Liu Chunsheng, an associate professor at the Central University of Finance and Economics in China, compared to FTP, China's FTZs are best-known for focusing primarily on institutional innovation – meaning that governments in FTZs introduce policies specific to their zones which are intended to facilitate trade and investment there. If they proved useful and generated positive outcomes where they were applied, a wider application may ensue in other parts of the country.

Now as China is going to build a Hainan FTP, the island is looking beyond small-scale trials of innovative economic policies associated with FTZs. Rather, the province will focus on creating a much freer international business environment and transforming into a major international trading, financial and shipping center.

With the support from the central government as well as the institution of a range of policies intended to achieve the above-mentioned goals, the future of Hainan looks promising.

First and foremost, a signature policy instituted by the Plan is that the island will implement zero tariffs for most of its imports, which will include manufacturing equipment, vehicles, raw materials and consumer goods, among others. This is going to boost free trade to a much greater extent.

Another major aspect Hainan will be focusing on is developing its tourism, service as well as high-tech industries. As the development of hi-technology is poised to dictate the future advancement of world economy and as manufacturing has not traditionally been the island's strong suit, China's State Council Information Office (SCIO) at a press conference on Monday pointed out that tourism, the service industry and the high-tech industry will be given special attention in developing Hainan going forward and for this reason, the Plan lays out a slew of favorable policies in these areas. For example, companies that fall into those industries will enjoy a 15-percent tax rate, the lowest end of corporate income tax rates on the mainland.

Chinese consumers will also be able to spend up to 100,000 yuan in duty-free shops on the island, compared to the 30,000-yuan limit set at the end of 2018. As large numbers of Chinese tourists head to Hong Kong each year for spending sprees due to the relatively low price of international consumer goods there, this policy will surely attract more tourists to the island.

Last but not least, the Plan also looks to lure more international talents to work in Hainan. Some individuals coming to work on the island will enjoy favorable personal income tax rates in the future, which are capped at 15 percent, 30 percent lower than the cap on the mainland and two percent that in Hong Kong. This means the FTP will not only enjoy the free flow of goods but also an abundance of talents, bringing in the skills and experiences it needs.

By developing Hainan FTP, China aims to emulate the success of Hong Kong and Singapore, both of which are renowned world trading and financial centers. However, while it is important to learn experiences from these two cities, Hainan will also have its own unique designs that suit its own conditions rather than imitating every policy from these two cities. This is because apart from their geographical advantages, low or zero tariffs and attractive tax regimes, the rise of Hong Kong and Singapore also has historical and institutional reasons that China cannot easily replicate. For example, Hong Kong once played an indispensable role in connecting the Chinese mainland with the outside world, which proved to be hugely beneficial to its economic growth.

Therefore, in the process of developing the Hainan FTP, the province will also have to align itself with China's social and economic reality. That's why in the Plan, it is noted that the Hainan FTP will be one with "Chinese characteristics." This, however, does not mean Hainan will be less successful. As Liu pointed out, the determining factor of Hainan's success is whether it can create a desirable business environment, meaning it's easy and lucrative to do businesses there.

"If Hainan can offer that, it will surely succeed," said Liu.

Author: Xu Sicong

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