Hainan Free Trade Port China's ambitious step towards further development

On 1 June 2020, China rolled out the Master Plan for the Construction of Hainan Free Trade Port (“the Masterplan”), a large-scale plan to transform the entire island province into a Free Trade Port (“FTP”). Aiming to further consolidate the foundation of the real economy and enhance economic competitiveness, the Masterplan set up the goals in stages - a FTP system will be "basically established" in Hainan by 2025, becoming "more mature" by 2035, and be completed by 2050 - with a focus on the liberalization and facilitation of trade, investment, transport and the flow of talent, capital and data.

In this article we provide a summary of the key preferential policies introduced by the Masterplan.

Key Policies

1. Liberalization of trade of goods and services

Hainan's transition from a free trade zone (“FTZ”) to a FTP is not just a simple upgrade. The purpose of the FTZ is to give play to its role of “first trial” in policy systems and to promote reproducible experience nationwide. The biggest feature of the FTP is the "zero tariff"-    based tax system arrangement, as well as a higher level of trade liberalization, facilitation and all-round opening up.

In terms of supervision mode, the FTP implements the special supervision mode of “first line” and “second line”

"First-line": is established between Hainan FTP and other countries (regions) outside China's borders. Except for prohibited and restricted imports and exports, goods and articles can be freely imported and exported.

"Second line" is a new management model established between the Hainan FTP and Mainland China. Goods entering the Mainland China from the FTP are subject to customs duties and import-related taxes in principle. Those who meet the conditions can enjoy import tax exemption preferential policies.

The plan also stated that Hainan will establish more special customs supervision zones to implement more flexible import and export management. The local government will also establish a convenient and efficient "single window" dealing with matters in relation to importing to and exporting from overseas countries.

2. Investment Facilitation
Furthermore, specific measures, including aviation, shipping, telecommunications, and finance, would be supported with tailored measures, and would guide the design of the lists of sectors open to foreign investment, i.e., the negative list and market access list.

Financial

• Promote the development of “Over The Counter” derivatives related to the construction of FTPs;
• Promote the construction of property rights trading venues, allowing non-residents to participate in transactions and conduct fund settlement;
• Support the establishment of property insurance, personal insurance, reinsurance; companies, mutual insurance organizations and self-insurance companies.

Telecommunications

• Set up pilots for international Internet data exchange gradually and establish international submarine fiber optic cables and landing sites;
• Foreign enterprise set up branches in FTP for online data processing and transaction processing;
• In the value-added telecommunications business, restrictions such as the proportion of foreign investment in shares will be gradually eliminated.

Aviation

• Liberalising the restrictions on foreign airlines flying through Hainan, including flights; between a foreign country and China by an airline of a third countries;
• Bonded jet fuel is allowed for flights to and from Hainan.

Shipping

• Container goods that meet the requirements and transit through Yangpu port will be eligible for tax refund;
• Export tax rebates will be granted to ships built in the Yangpu port and engaged in international transportation.

3. Tax measures
Regarding the "zero tariff" policy, after the implementation of island-wide customs clearance operation and degenerate tax system, the goods which are not included in the Catalogue of Goods subject to Import Duties are allowed to be imported to Hainan FTP and will be exempted from import duties. Goods with "zero tariff" will be exempted from routine customs supervision. At that time, the special customs supervision areas such as Yangpu Bonded Port Area and Haikou Comprehensive Bonded Area will no longer be retained.

According to the preferential tax measures, for enterprises in the "Encouraged Industry", 15% corporate income tax (“CIT”) rate, instead of the currently applicable standard corporate income tax rate 25%, will be applied. For individuals with high-end or urgently needed skills, the maximum rate of individual income tax is 15%, which is far lower compared to the current progressive tax rate of 45%.

In addition, a CIT exemption would apply to foreign-sourced dividend income received by newly established Hainan enterprises in the tourism, modern services, and high-tech industry sectors (i.e. the tax exemption method of double tax deduction is adopted instead of the corporate income tax system under the existing credit relief system). Complete (100%) tax depreciation and accelerated depreciation regimes would also be available.

In addition to the above, the plan mentions that tax payment will be assessed and pre-warned in accordance with the principle of the locations of substantial economic activities and value creation. The local government will use the actual place of business and place of residence as the criteria to prevent tax base erosion and profit transfer.

Distinguished Features
A significant feature of Hainan FTP is that the zone is an entire island, spanning 35,400 square kilometers – about 32 times the area of Hong Kong. The other 11 FTZs in Mainland China cover an average area of about 120 square kilometers.

Diversified pilot base –The other 11 free trade pilot zones are located in areas with sound economic foundations. Hainan Island builds pilot FTZs in both developed and underdeveloped areas, which can form more pilot experience.

Strong collaboration – The island-wide pilot program will help bring into full play the advantages of highly consistent pilot FTZs and administrative divisions, improve the integrity and coordination of institutional innovation, and strengthen the integration of reform systems.

The rise of Hainan will also not take a toll on Hong Kong's status. Both the positioning and industry focus of the Hainan FTP are different from Hong Kong's, indicating that complementarity outweighs competition in the two regions. Hainan's weak industrial foundation and unskilled workforce will also make it hard to compete with Hong Kong and other FTZs in China.

Observations
The Masterplan signals that the development goal of Hainan FTP is to initially establish a FTP policy system focusing on free-flowing monetary measures and efficient investment facilities by 2025. By 2035, it will become a new highland for China's open economy. By the middle of this century, a high-level FTP with international influence will be cultivated. This will promote the formation of a new pattern of high-level opening of China and play an important role in supporting its economic globalization.