A tourist hotspot closer to Hanoi than Beijing is set to provide a litmus test for a signature economic reform policy that Chinese President Xi Jinping is determined to present as evidence of the country’s commitment to free trade.
At the end of a year of economic turmoil triggered by US President Donald Trump’s global imposition of “reciprocal tariffs,” China’s southernmost province, Hainan, known as the nation’s Hawaii for its warm weather and pristine beaches, officially launches on December 18 as a free trade zone bigger than Belgium.
Xi’s aim is to use the absence of tariffs and tax breaks on the island to stoke foreign direct investment (FDI) and build a manufacturing base in a comparatively underdeveloped province as a launchpad for reviving economic growth in the longer term, at a time when trade tensions cast a giant shadow on the outlook for the world’s second largest economy. The government hasn’t said exactly how much of a boost it expects, but aims to develop the Hainan free trade port (FTP) such that it has “strong international influence” by 2050.
Hainan, a training site for the Chinese national beach volleyball team and host to a strategic naval base, faces an uphill battle. Its economy is smaller than Hong Kong’s, pays mostly low wages, and attracts a tiny fraction of China’s FDI. But policymakers are betting its size and proximity to Southeast Asia could help it catch up quickly, although observers say obstacles such as a lack of highly skilled workers and international talent may be tough to overcome.
The goal is to turn Hainan into the biggest of China’s scores of free trade zones, scattered across 22 provinces, to “develop it into an important gateway that will lead China’s new era of opening up to the outside world,” Xi said during a visit to the island’s southern city of Sanya.
Xi set a symbolic date, December 18, for the start of independent customs operations and a major expansion of duty-free imports, covering nearly three quarters of all expected shipments. December 18 is the anniversary of the launch of then-President Deng Xiaoping’s “Reform and Opening Up” policy in 1978. Xi’s initiative calls for transshipments to other parts of China to be exempt from import duties if companies in Hainan add at least 30% to the value of the imports.
“Hainan is an experimental ground for a deeper and broader liberalization,” said Chen Bo, senior research fellow at the National University of Singapore’s East Asian Institute. “If it’s successful, then most of the policies will sooner or later be replicated [in] the rest of China.”
Xi can take heart from early signs of international interest in Hainan. In July, Indian drugmaker Sun Pharma announced the establishment of a subsidiary on the island, which it said will involve localization of products made by Chinese partners for sales in China.
Perhaps the most high-profile backer of the project internationally is Dhanin Chearavanont, the billionaire senior chairman of Thai conglomerate CP Group. He visited Hainan around the time of Xi’s visit and held meetings with local party officials and businesspeople, according to local media, which identified Chearavanont by his Chinese name, Xie Guomin.
“The world market is still vast, and it is necessary to cooperate with top Chinese enterprises to bring the most successful and advanced practices overseas, especially to Southeast Asia and other Belt and Road countries, to achieve common development and mutual interdependence,” Chearavanont was quoted as saying during an overseas Chinese business investment conference in Haikou on November 6. The Belt and Road Initiative is Beijing’s string of infrastructure projects aimed at forging economic links across Asia and into Europe.
While the potential may be significant, to be successful, the Hainan free trade port project will have to navigate previously uncharted waters.
“China’s reform and opening up policy is at a crossroads as the global geoeconomic reality evolves,” Ni Xu and Jingling Xiu wrote in a research paper for the Asia Competitiveness Institute at the Lee Kuan Yew School of Public Policy. “Hainan FTP provides a litmus test of the country’s willingness to explore liberalization and regional economic integration.
“Hainan remains in a nascent developmental stage with relatively weak economic fundamentals. … Comparisons with international models such as Singapore and Hong Kong reveal Hainan’s structural limitations. The Hainan FTP might face significant challenges in replicating these jurisdictions’ sophisticated institutional frameworks and operational autonomy.”
Hainan’s economy is still reeling from a property market downturn that has dragged on for years. The scars are visible on Ocean Flower Island, an artificial island just a short drive away from the port of Yangpu, Hainan’s main import hub. The project was developed by Evergrande, a property company that accumulated more than USD 300 billion in debt before its collapse. The company has become a symbol of the property market’s boom and bust.
A residential area was bustling with people, comprising mostly tourists from northeastern regions of China seeking to avoid the winter cold, according to a tour guide. But some of the main attractions, including a water park and convention center, were empty on a recent weekday. Steel gates blocked the entrance of a Fairyland theme park with Chinese style architecture.
The Chinese owner of a Russian-themed restaurant in one of the island’s shopping areas recalled that during the property boom, apartments on Ocean Island sold for RMB 28,000 (USD 3,920) per square meter. The price has since dropped to RMB 6,000 (USD 840), he said. Rooms are available for rent for as little as RMB 500 (USD 70) a month, according to one real estate agent on the island.
Still, preparations for December 18 have kicked into high gear since Xi’s visit. White-shirted local officials were seen inspecting ports and shopping malls in mid-November, peppering employees with questions. A flurry of seminars and conferences have been organized to promote the island.
“When you talk of China, you talk of Beijing, Shanghai, Guangzhou,” said Rahul Batra, CEO of Hudson McKenzie, a UK-based law firm specializing in migration. “Suddenly Hainan comes out of nowhere, and now people are talking about it.”
Xi first announced plans to turn Hainan into a free trade port in 2018. A “masterplan” was released in 2020, with a goal to “initially establish” policies by 2025 and make it “more mature” by 2035. Details of its operations were announced by the government in July.
The zero-tariff policy on 74% of all imports is coupled with a corporate tax rate of 15% for qualified companies, compared with 25% in other parts of China, as well as a 15% individual income tax rate for their high-skilled workers. A string of regulations to boost consumer spending on the island also took effect: Starting November, for example, Hainan eased rules on duty-free goods visitors and local residents are eligible to purchase.
Spanning about 35,100 square kilometers, Hainan dwarfs free trade zones in Shanghai, Tianjin, and elsewhere covering 120–240 square kilometers. It is also about 30 times larger than Hong Kong.
Batra said Hainan’s larger size makes it more suitable for companies in industries such as manufacturing and retail. “Hong Kong is more finance- and service-oriented,” he said. “Comparing Hainan to Hong Kong at this point in time is a bit premature. … It’s just at an infancy stage right now.”
Shenzhen, which became China’s first special economic zone in 1980, may offer a more useful guide to Hainan’s prospects. Low wages and tariffs transformed the fishing village into a sprawling tech hub that is now home to leading tech giants like Huawei, BYD, and Tencent. China will showcase what it calls an economic miracle to global leaders when it hosts the Asia-Pacific Economic Cooperation forum in the city next year.
While the Trump tariff policies present an opportunity for Beijing to showcase Hainan as a demonstration of its support for free trade, opening up its domestic market could also help ease trade tensions with other parts of the world. As Chinese exporters increasingly target alternative markets like Southeast Asia in the wake of US tariffs on their goods, concerns have grown over cheap goods flooding the regional market and putting local businesses out of business.
“Because of the geopolitical tensions and economic rivalries between China and the US, China needs to accelerate the pace of its liberalization reforms,” said Chen at the National University of Singapore. “Hainan free trade port is one of the concrete actions that China can show.”
Yuan Xiaoming, assistant minister at China’s Ministry of Commerce, said at a July news conference that “unilateralism and protectionism are intensifying globally, and economic globalization is facing headwinds.” He said Hainan will not only contribute to China’s economic recovery but will also “inject stability and certainty into the global economy.”
In one example of how Beijing hopes to position Hainan regionally, Thailand’s CP Group invested in a coffee processing factory in the east of the island in 2020 and upgraded the equipment a few years later. An employee there, who requested anonymity, explained that with the new policies, the factory will be able to import beans, process them in Hainan and export them to countries like Australia for prices that are about 20% lower than shipping them from other parts of China.
Whether the policies will actually boost FDI into Hainan is still unclear. Since 2010, China has already had a free trade agreement with ASEAN, making Hainan’s zero-tariff policy less appealing than it once would have been. The two sides in October also upgraded the pact to a version “3.0,” expanding cooperation to areas including digital transformation, sustainable energy, and small enterprises.
While banners promoting the free trade port are visible everywhere, some local residents are skeptical the policies will improve their livelihoods.
“Wages are still low here, and a lot of young people move to other provinces for better opportunities,” said Huang, who lives near Yangpu Port. Huang, who gave only his surname, said he looked for a job for six months, but the best one he could land was an inspection officer position offering a salary of RMB 7,000 (USD 980) per month. “I ended up not taking it because the working hours were too long,” said Huang, who now works as a driver.
Some retailers at CDF International Duty-Free City, across the island in Haikou, which bills itself as the world’s largest duty-free shopping mall, were similarly unimpressed. “Many online retailers already offer duty-free prices, so we need to make additional promotions to attract customers,” said one employee at an imported powdered milk shop who declined to be identified. Elsewhere, cosmetic brands like Lancome, owned by L’Oreal of France, were offering 40% discounts on some products.
Back in the southern city of Sanya, Xi also used his visit last month to commission a new aircraft carrier, and stressed that liberalization should not compromise national security.
“The greater the opening up, the more we must coordinate development and security,” said Xi during his speech. “We must plan the pace and progress of opening up scientifically and in an orderly way, … and proceed steadily, with a solid footing,” Xi cautioned.
This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.