China passes law to make Hainan a free trade haven

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HANGZHOU, China – China moved ahead with plans to transform the southern resort island of Hainan into a free trade hub, passing a law on Thursday to lower barriers to cross-border investment.

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

The government is seeking to make Hainan a center for foreign finance as well as a destination for Chinese buyers, distributing functions that were largely concentrated in Hong Kong, although geopolitical risks and a talent shortage could put the brakes on these plans.

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

Policies are also encouraging Chinese investment abroad, reflecting a shift in priorities from preventing capital flight before the coronavirus to promoting the yuan as an international currency. National approved funds will be able to invest in unlisted foreign stocks, up to a quota of $ 5 billion.

China, which wants to avoid isolating itself economically amid persistent friction with the United States and Europe, hopes to attract companies and talent from abroad by further opening up finance and trade to outside players.

The government is also keen to capitalize on domestic demand, as tensions with Washington – which China expects to continue for some time – leaves prospects for export markets in question. The reforms in Hainan are aimed at bringing back domestic demand that had been satisfied abroad.

This includes medical tourism, a market that has been exploited by Japanese cities, among others. China continues to develop a 20 km² medical tourism area in Boao with 16 medical facilities.

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

“It attracts wealthy people from all over China,” said a representative.

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

Hainan serves as a testing ground for programs that will be set up on the mainland if successful. The government’s plan to make it a “clean energy island” foresees that clean electricity sources will represent 85% of its production capacity by 2030 and that sales of conventional gasoline vehicles will end by now. this year.

The island could also become a test bed for real estate policy. The finance ministry plans to introduce property taxes on a trial basis in several cities to curb the price hike and stabilize local finances, and many experts see Hainan as a prime 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 Hainan’s party leader, said last June.

The island attracts Chinese travelers with duty-free shopping, partially shifting Hong Kong’s role as a top domestic business destination, but it remains pale compared to Hong Kong as a financial hub.

And geopolitics also poses a risk. The United States and Europe have hit China with sanctions on issues such as 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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