OK, let’s start at the beginning.
In June 2020, China released a master plan for the development of the Hainan Free Trade Port (FTP), aiming to build Hainan Island into a globally influential free trade port by the middle of the century. As part of the master plan, the FTP is set to introduce island-wide customs clearance operations by 2025, which will be a foundation and a milestone for its future development.
Independent Custom Operations refers to when Hainan will become an open area under special customs supervision and implements “Free flow through the first line and efficient control at the second line.
“Free-flow through the first line” means that customs clearance procedures between Hainan and other countries will be streamlined and simplified, making it faster and more efficient for goods and people to pass through the customs checkpoints. Additionally, the policy may include certain exemptions or reductions in customs duties and other taxes to encourage trade and investment.
The “second line” is a metaphor for the border specifically between Hainan and the Chinese mainland. It is called the “second line” because it is the second line of defence for China’s customs and border control. The first line of defence is of course the border between Hainan and other countries. The “efficient control at the second line” is a set of measures that are used to monitor and control the flow of goods and people between Hainan and the Chinese mainland. These measures include:
Customs clearance procedures;
Quarantine procedures;
Inspection procedures and;
Security checks.
What are the three task lists and what do they entail?
April 2022, Hainan Province announced three ‘task lists’ necessary to complete all the preparation work for customs clearance operations by the end of 2024.
The first task list involves the supervision of the preparation work by leaders of the provincial government, who will monitor the progress and receive regular updates and feedback. This task list aims to ensure that the preparation work is on track and any issues or delays are addressed promptly.
The second task list regards project construction. Hainan has planned over 50 projects related to the customs clearance operations, with an investment of more than 19 billion RMB. To this end, the province sought financial support from the central government and set up green channels for the approval of projects to ensure they are started and completed on time.
The first 25 island-wide independent customs operation projects are underway and with a total investment of about 11.7 billion yuan ($1.7 billion), they involve the construction of facilities at eight ports that are open to foreign countries, as well as the development of information platforms.
The third task list covers stress testing risk prevention and control measures relating to key FTP policy implementation to ensure that these policies can be implemented in a progressive and smooth manner.
What is stress testing and why is it necessary?
The specific objectives of the stress testing for the customs closure of Hainan Island Free Trade Port are to:
- Assess the potential impact of customs closure on the port’s operations and efficiency;
- Identify and mitigate any potential risks and challenges associated with customs closure;
- Develop contingency plans in the event of unexpected disruptions.
The scope of the stress testing will include a comprehensive review of the port’s operations, including its cargo handling, warehousing, and logistics facilities. The testing will also assess the port’s ability to handle increased volumes of traffic and to maintain its current level of service in the event of customs closure.
There are a number of potential risks and challenges that the Hainan FTP may face during its implementation, including:
- Increased smuggling and illegal activities;
- Disruptions to the port’s operations;
- Increased costs for businesses operating in the port;
- Negative impacts on the local economy.
The Hainan FTP authorities are aware of these risks and challenges and the stress tests are all about identifying and taking steps to mitigate them. For example, the authorities are strengthening the port’s security and are working to develop a more efficient and streamlined customs clearance processes.
In addition to the risks and challenges mentioned above, there are a number of other factors that could impact the implementation of the Hainan FTP, including:
- The global economic climate;
- The global political situation;
- The development of other free trade zones in the region.
The Hainan FTP authorities will need to closely monitor these factors and make adjustments to their plans as needed. By doing so, they can help to ensure that the Hainan FTP becomes a success.
What else will the stress testing examine?
After the implementation of the “free-flow through the first line ” policy in the free trade port, a large number of goods from abroad will enter Hainan directly at zero tariffs. The stress testing will examine whether these goods will enter the mainland, whether they will have an impact on the mainland industries, and whether they will have an impact on Hainan’s industries.
Additionally, after the free trade port customs closure, tax reform will be implemented, gradually phasing out value-added tax and introducing a sales tax instead. The stress testing will examine the appropriate level of sales tax and how it should be allocated across the entire island.
The stress testing will consider a number of factors, including:
- The impact of the sales tax on the price of goods and services in Hainan;
- The impact of the sales tax on the competitiveness of Hainan’s businesses;
- The impact of the sales tax on the government’s revenue;
- The impact of the sales tax on the distribution of income in Hainan.
Stress testing will be used to fully test most of the policies of the free trade port before closure. It is seen as essential to ensure that the policies of the free trade port are reliable, efficient, and effective before implementation. It is necessary to identify and address any potential issues, to minimize operational risks and ensure a smooth and successful implementation of the free trade port policies.
According to Wang Bin, a member of the Standing Committee of the Communist Party of China’s Hainan Committee, the entire island of Hainan “is ready for customs closure and the 64 tasks, 31 construction projects and 27 pressure tests, are being looked at to ensure that the hardware conditions for customs closure are available this year and expanded to the entire island by the end of 2025.”
“With the adoption of the “commitment-based entry system”, it’s expected that many enterprises will enter Hainan, and risk management and regulatory issues also need to be stress tested.”
The “commitment-based entry” system is a new approach to foreign investment management whereby foreign investors are required to submit a commitment letter outlining their investment plans and demonstrating their compliance with local laws and regulations, instead of going through the traditional approval process.
To this end, Hainan is turning Yangpu into a stress test area in preparation for its independent customs operations in 2025. The policies granted for the Yangpu Bonded Port Zone will now be implemented in the whole of the Yangpu Economic Development Zone.
The tariff-free policy for domestic sales of products after value-added processing is accessible to all eligible enterprises in Yangpu. The stress test covers fields such as regulatory models, tax system reform, information technology and policy synergies.
According to Zhang Hong Guang Director-General of the Yangpu Bonded Port Area Development Bureau “Eligible Yangpu enterprises will enjoy a simplified declaration process, a tariff-free policy for domestic sales of products after value-added processing and a reduction in customs clearance time at Yangpu port.”
What impacts will the closure of Hainan Island have on residents and companies in the FTP? What risks need to be focused on for prevention and control?
According to Li Shijie, Dean of Hainan Open Economic Research Institute, the closure of Hainan Island for customs purposes is expected to have a positive impact on businesses, consumers, and service trade industries. Businesses, both domestic and foreign, can benefit from Hainan’s low costs and use the island as a base for their operations, expanding their investment goals worldwide. Foreign companies can also take advantage of Hainan’s policies to enter the domestic market.
For consumers, especially those from Hainan, they can purchase international goods at lower prices, as many imported goods may experience a price drop of around 30% after exemptions from value-added tax, consumption tax, and tariffs. Hainan is expected to attract more service trade industries, allowing Hainan residents and domestic and international tourists to enjoy more internationalised services.
Some examples of internationalized services that Hainan residents and domestic and international tourists can expect to enjoy include:
- Financial services: Hainan is expected to attract more foreign financial institutions, which will provide a wider range of financial services to consumers and businesses. This includes things like international banking, insurance, and asset management.
- Logistics services: Hainan is expected to become a major logistics hub for the region. This will make it easier for businesses to import and export goods, and will also make it easier for tourists to travel to and from Hainan.
- Tourism services: Hainan is already a popular tourist destination, but it is expected to become even more popular with the development of the free trade port. This is because the free trade port will make it easier for foreign tourists to visit Hainan, and will also provide them with a wider range of services and amenities.
- Education services: Hainan is expected to attract more foreign universities and schools, which will provide a wider range of educational opportunities to students from Hainan and around the world. This includes things like international schools, language schools, and vocational training programs.
- Medical services: Hainan is expected to attract more foreign medical professionals and hospitals, which will provide a wider range of medical services to consumers and businesses. This includes things like international hospitals, clinics, and pharmacies.
Hainan Island’s comprehensive border control operation: which risks need to be prioritized for prevention and control?
According to Li Shijie, Hainan Province has been preparing for border control operations for a number of years, especially since 2020. Policies such as zero tariffs and low tax rates in the free trade port have been tested in a few areas such as Yangpu, and some work has become relatively mature after testing.
In response to data security issues, Hainan Province has collaborated with relevant departments such as the National Internet Information Office to promote the integration and innovation of a series of systems to establish mechanisms for risk resolution. Based on past experience and completed testing work, it is expected that most risks can be prevented.
It should be noted that in terms of financial sector openness, Hainan Province still needs to do a lot of work, and the preparation in this regard still requires the support of central departments, especially the People’s Bank of China. Currently, related work is still being promoted. The Hainan free trade port needs to strengthen cooperation with central departments in this regard.
Is the customs closure an entire island closure?
Closing the island is a customs term, referring to the whole of Hainan Island being supervised by customs with regards to tariffs. The objects of management are mainly goods, commodities and means of transport, there will be no change in travel procedures with the mainland.
Will I need additional documents to travel to Hainan after closure?
Hainan Island customs closure will not affect the movement of people. On April 2022, 4, Feng Fei, then governor of Hainan Province, said at the Global Free Trade Port Development Forum at the Boao Forum for Asia Annual Conference that there will be no change in personnel exchanges between Hainan and the mainland after the island-wide customs closure.
How is the customs closure being stress tested?
Business experts selected by the General Administration of Customs from customs areas across the country have arrived in Hainan, and will carry out a two-year concentrated attack on Haikou Customs until 2025, when the whole island will be closed for operation.
The General Administration of Customs together with National Customs Agencies have sent working groups from customs closure operations, smart supervision platform construction, tax administration research, port construction, risk prevention and control to Hainan to carry out research and inspection and focus on tackling key problems.
Related article: Hainan Opens the Door to Hong Kong: Ten Measures to Boost Professional Service Market
