Could Hainan’s free trade port plan see it outpace Hong Kong as a hub

For forty years after the 1949 revolution, the island of Hainan was part of Guangdong province for administrative purposes. Its economy was rudimentary, relying on fishing, rubber production and coconuts. The planners didn’t push for much more, worried that investment there was riskier because it was on the frontline of the nation’s southern coastal defences.

Yet in 1986 Hainan caught the attention of Hong Kong tycoon Li Ka-shing. In a meeting with Xu Jiatun, then head of the Hong Kong branch of the Xinhua News Agency (at the time China’s unofficial envoy to the British colony), Li proposed an investment of HK$10 billion to develop Hainan into a ‘special zone’.

There was a proviso: Li said the scheme was conditional on Xu becoming Hainan’s political boss or else chairman of the investment firm that would run the island.

Inspired by the idea, Xu penned a letter to Deng Xiaoping proposing to separate Hainan from Guangdong and make it into a free trade port like Hong Kong.

“[I proposed] to set up the biggest special zone of the country, and asked for supportive policies even more ‘special’ than all other special zones [such as Shenzhen],” he recalled in his memoir.

In 1988 Hainan was redesignated as a standalone province. But Li’s farreaching proposal was rejected because ceding land to private sector investors was then politically taboo. Indeed, when the provincial government later sold a smaller site in Hainan’s Yangpu port to a consortium led by Li and the Japanese firm Kumagai Gumi, the decision provoked a wider backlash at what was deemed “a loss of sovereignty”.

Hainan ‘province’ celebrates its 30th anniversary this year. And the Chinese leadership now seems prepared to authorise a fuller opening up of its economy. In a birthday gift last week, Xi Jinping, the Chinese president, announced a plan to turn Hainan into the country’s first free trade port. Among the news was a landmark concession: betting on horseracing will be permitted on the island. That’s left many in Hong Kong and Macau concerned that their own cities may no longer be regarded as quite so ‘special’ as Hainan develops as a gaming rival.

What is being proposed?

The news emerged last Friday when Xi was at an event celebrating the 30th anniversary of Hainan province’s founding, with an announcement of his backing for the island’s transformation into “a free trade port with Chinese characteristics”.

“China welcomes investors worldwide to invest and start business in Hainan and participate in the building of a free trade port there,” Xi said.

The State Council followed up with more details the next day. The zone would be launched by 2020, the policy document said, with a goal of establishing China’s first “free trade port” (FTP) five years later.

The central government has approved blueprints for at least 20 national-level “free trade zones” (FTZ) or “special development areas” since 1992, such as the Shanghai FTZ (see WiC202) and the Xiongan New Area (see WiC361).

The idea of an FTP was first mentioned by Xi during the 19th Party Congress in October last year. “A free trade port represents the highest level of opening-up,” Xinhua then explained, adding that broad-based preferential policies on trade and investment would be introduced.

Many cities have been lobbying for FTP status since then and it was widely reported that the Shanghai FTZ would be the first to get the green light. Now it seems Hainan has been picked as the pilot.

The decision was unveiled during Xi’s week-long visit to the island, which he kicked off by committing to deepening China’s economic reforms in a keynote speech to the annual Boao Forum (see WiC404). Then he donned camouflage fatigues to oversee the largest naval parade in Chinese history, with at least 48 warships taking part in a drill in nearby waters.

More broadly, the plan for Hainan is to showcase China’s ‘deepening’ reforms, with the province on a mission to become the country’s “ecological civilisation” centre, a tourism hotspot and a national “strategic base”, because of its rich resources and location in the South China Sea, Xinhua reports.

The symbolism was obvious to the Hong Kong newspapers too. They described Xi’s visit to Hainan as deliberately echoing Deng Xiaoping’s famed ‘Southern Tour’ to Guangdong in 1992 in which the former leader rebooted the country’s economic reform agenda (see WiC136).

What’s so special about Hainan?

Xi’s father Xi Zhongxun was one of the key advocates of setting up China’s first “special economic zones”, notably in Shenzhen in the early 1980s.

Xinhua has recently been circulating black and white photos of a young Xi relaxing with his father – who was then Guangdong’s governor – on a Hainan beach, with the state news agency revealing that Xi has “strong feelings” for the island.

Hainan already enjoys status as a special economic zone. But Xi junior now seems prepared to liberalise it further via FTP status in what has been dubbed by media as “the 2.0 version” of the country’s reform and opening up process.

Hainan is China’s smallest province by land area. But its location means that it also supports more than 60% of China’s oceanic claims (including disputed territories in the South China Sea). Given that the island is on a similar latitude to Hawaii, economic planners positioned it as a tourism hub or “China’s Hawaii” in 2010, resultantly adding millions of holidaymakers to the 10 million permanent residents.

In another move linked to the announcement, visa-free access to Hainan was extended to nationals from another 33 countries this week, meaning that visitors from 59 nations can now come to the province without a visa and stay for as many as 30 days.

But the central government also seems to envisage the island developing in other ways – as “China’s Dubai”, as Beijing Youth Daily has put it – by equating FTP status with international financial hubs such as Dubai, Hong Kong and Singapore.

While details are yet to emerge, it seems likely that the free port plan will be designed to attract more investment in advanced technology that spurs the upgrading of the Chinese economy.

Schemes like these are likely to involve further easing of capital controls and the scrapping of customs duties, and to permit a greater sense of experimentation than in the current free-trade zones.

When regulators have relaxed the trade and investment rules in Hainan in the past, there has often been a nasty reckoning. In the wake of achieving ‘trial’ status as a duty-free port for 16 types of imported goods – including cars – in the mid-eighties, there was a major scandal in which local government officials colluded with speculators to secure foreign exchange illegally. Hainan has long had a reputation as a haven that’s too far away for the central authorities to maintain full oversight (the aviation conglomerate HNA Group, China’s most acquisitive and, arguably most inscrutable firm, is also based there, see WiC362).

When Hainan was first granted provincial status, it triggered a property boom that burst in spectacular fashion in the early 1990s. Probably in anticipation of another round of real estate speculation as a result of the free trade port news, the Hainan housing bureau issued a notice on Monday reminding cities and counties to curb speculation. Non-Hainanese can only purchase a single residential property on the island, for instance, and local residents wanting a second property in one of seven “overheated” locations, including Sanya and Haikou, must show lengthy records of income tax and social insurance payments.

Another new rule states that residential properties bought after March 30 should not be eligible for resale for five years, Xinhua reports.

How about horseracing: now under starters’ orders?

In its 2010 directive the State Council suggested that Hainan would be encouraged to “explore” the development of “sports lotteries on large international events” so as to support its goal of becoming an “international tourism island”.

That stoked speculation that Hainan would open the door to horseracing and even casino gaming (see WiC48), both of which are banned in China – except in the special administrative regions of Hong Kong and Macau.

Takungpo, a pro-Beijing newspaper in Hong Kong, reported in March 2010 that the Hainan government had also invited the Hong Kong Jockey Club (HKJC) to invest in a race track in Sanya and operate lottery-related businesses.

Even as the Hainan government denied that same year it would legalise gambling some hotel operators came up with “casino bars” or “intelligence gaming rooms” that allowed punters to gamble on chips exchangeable into prizes such as antiques (see WiC224).

Eight years on and the State Council document that came out last week – notably endorsed by Xi – is more specific on what might be allowed. It makes plain that the central government will now encourage Hainan to develop a “horseracing sports” industry and to explore “guessing-style sport lotteries on major international events” (i.e. gambling).

The wording suggests that Hong Kong and Macau may lose their monopolies on betting on horse racing, while casinos may also open in Hainan to rival those of Macau.

In January last year we reported that the attitudes of regulators towards horseracing were evolving and that some insiders were concluding that legalisation would come sooner rather than later (see our Talking Point in WiC353).

Li Hai, director of the Sport Lottery Research Centre, believes Hainan will now be allowed to develop horseracing ‘lotteries’ (the preferred Chinese term for betting). However, he doesn’t think the government will lift the ban on casinos in the near future. “Developing horseracing can be a stimulus for tourism, just like the situation in Hong Kong,” Li told the Global Times. “But such a long industrial chain needs a transparent and just management environment, which the government should work at.”

Chances are the HKJC may find it has a role to play in Hainan as well. In a statement published last week, the operator of Hong Kong’s horseracing industry said it would be pleased to exchange views on the promotion of equine sports in Hainan, if invited by the authorities, but that there has not been any discussion so far.

And the wider consequences for Hong Kong and Macau?

Since the creation of two “special new zones” in Shenzhen’s Qianhai (see WiC180) and Zhuhai’s Hengqin (see WiC208) – adjacent to Hong Kong and Macau respectively – there has been speculation that the two cities will lose some of their competitiveness to rivals in southern China.

Hainan’s recasting as an FTP has only served to reinforce that view, particularly as the news came at a time when two of the most influential businessmen from Hong Kong and Macau are stepping down. Li Ka-shing, the man who first proposed the transformation of Hainan, announced his retirement as chairman of flagship company CK Hutchison last month. And the ‘end of an era’ sentiment strengthened last week when Macau’s leading gaming firm SJM Holdings said that casino mogul Stanley Ho would pass the torch to one of his daughters.

Hong Kong Economic Times reported that the share prices of Macau’s casino stocks fell in the days after the Hainan plan was announced, while those of “Hainan concept” firms, including some of HNA Group’s listed units, have soared. But can a free trade port in Hainan compete with Hong Kong, which has been ranked by the Heritage Foundation as the world’s freest economy for 24 years in a row?

This is the question that domestic media has been asking over the past week as commentators debate how an FTP will be defined.

“It is too early to suggest Hainan will be more open than Hong Kong,” Zhang Yansheng, chief researcher at China Centre for International Economic Exchanges, told National Business Daily. “Let’s not talk about the tenth step before we set foot on the first.”

One concern for Hong Kong will be Hainan competing for mainland shoppers – of which the former colony welcomed a whopping 44 million last year. The big- spending visitors are attracted by Hong Kong’s lower prices for goods, which don’t incur the same luxury taxes or VAT charged on the mainland. Hainan as an FTP would presumably drop these taxes too and thus have grounds for stealing business from Hong Kong’s malls. And because of Hong Kong’s astronomical commercial rents, it’s plausible that a low-tax Hainan could market itself as a better-value destination for Chinese shoppers.

Tellingly, during a session at the Boao Forum last week, Hong Kong’s chief executive Carrie Lam also asked how cities in the so-called Greater Bay Area in Guangdong province should avoid “overlapping” development.

“Basically she [Carrie Lam] was asking in a diplomatic way who should do what in the future,” Tammy Tam, editor-in-chief of the city’s South China Morning Post wrote in an op-ed. “And now here comes Hainan, another competitor or potential partner, depending on how you see it.”

Reprinted with permission by weekinchina.com