The Hainan Free Trade Port (2): Multi-Sector Opportunities

Buttressed by the planning and legal framework provided by the Overall Plan for the Construction of Hainan Free Trade Port (Overall Plan) and the Hainan Free Trade Port Law of the People’s Republic of China, Hainan is rapidly working towards the establishment of the Hainan Free Trade Port—a free trade port that covers the entire island. The Overall Plan specifies that, by 2025, a system of policies and institutions will be in place to facilitate free trade and investment. Since the Overall Plan was issued in 2020, a succession of policies and plans has been unveiled. As planning becomes increasingly detailed and specific, and as policies are gradually implemented, companies from Hong Kong and abroad are looking more closely at investing in Hainan.

The Overall Plan states that Hainan Free Trade Port will strive to foster high-tech industries revolving around the internet-of-things, artificial intelligence, blockchain and digital trade. Consequently, the development and production of new diagnostic reagents, the manufacturing of high-definition digital video equipment and similar industries are expected to be welcomed in Hainan. Furthermore, as Hainan is hoping to boost its tourism industry, Hong Kong companies can also consider engaging in related industries, including the design and production of tourism-related handicrafts, the design and processing of jewellery, and the production of candies. On the other hand, because Hainan places great emphasis on environmental protection, industries that are polluting or have high energy consumption and high emissions would be subject to market access and operational restrictions.

Hainan is preparing to launch island-wide independent customs operation in 2025. By then, most merchandise entering Hainan will be admitted tariff free. The central government has already rolled out a series of policies that exempt production raw materials and equipment from customs duties, import-stage VAT and consumption tax. The zero-tax policy for raw and auxiliary materials and vehicles is implemented through a positive list, while the tax exemption policy for own-use production equipment is carried out through a negative list. Equipment needed for business operations also enjoys zero tax with the exception of 10 sectors including the tanning and processing of leather and the production of chemicals from coal. Some additional specific items are also banned from importation by the State or not granted tax exemptions. It should be noted that, raw materials and tools that are granted tax-exempt status can only be used in Hainan.

At present, most of the logistics related policies of Hainan deal with the situation at the Yangpu Economic Development Zone, which is located in the northwest of Hainan and is a logistics hub for the island. For the Hainan Free Trade Port as a whole, the government is facilitating trade and developing logistics related industries. Currently, when an enterprise makes a paperless customs declaration at the “single window” for international trade, it will not have to submit any contract, packing list or cargo list at the import stage, nor will it have to submit any contract, invoice, packing list and cargo list at the export stage. Such documents need to be submitted only when the customs authority finds it necessary during reviews. In May 2021, the government approved the new Haikou Airport Comprehensive Bonded Zone. This is the third comprehensive bonded zone in Hainan, the others being the Yangpu Bonded Port Area and the Haikou Comprehensive Bonded Zone. This new bonded zone will focus on the aviation industry, including the development of aircraft maintenance, bonded aviation materials and logistics.

As to future development, according to the 14th Five-Year Plan for the Development of Modern Logistics Industry in Hainan Province (in Chinese only), Hainan will continue to focus on boosting its infrastructure to offset its weakness in logistics development. The measures being planned include improving seaport and airport facilities, expanding railway freight stations, continuing the development of cross-border e-commerce logistics, upgrading equipment for cold-chain logistics, and more. Hainan will concentrate efforts on establishing four logistics hub clusters in Haikou, Sanya, Yangpu and Dongfang. In Haikou and Sanya, the emphasis is on consumer product logistics and processing, while in Yangpu and Dongfang, while in Yangpu and Dongfang, the priority will be both on consumer and commodity goods logistics. It is worth noting that Hainan will be heavily involved in the construction of a new land-sea corridor in western China. It will become the sea access point for this new corridor to connect with other Belt and Road countries.³

Since the nationwide cancellation of foreign shareholding restrictions on securities, futures and life insurance companies in 2020, there are now no market access or operational restrictions for foreign (including Hong Kong) companies. Measures related to administrative approval, qualification and national security in the financial sector will have to be carried out in accordance with current regulations. Hainan has already rolled out many policies for promoting financial development in the Free Trade Port. In particular, it has removed minimum entry requirements for the registration of Qualified Foreign Limited Partnership (QFLP) enterprises. Also, according to Circular of the Hainan Branch of the State Administration of Foreign Exchange on Supporting the Establishment of Policies for Innovative Foreign Exchange Business in the Hainan Free Trade Port, banks can carry out registration procedures for domestic direct investment in foreign exchange according to the business registration information of the foreign-invested enterprise concerned. This will simplify registration procedures for foreigners to invest directly in foreign exchange as there is no need to submit business report information.

The central government emphasises the financial development of the Hainan Free Trade Port. In March 2021, the People’s Bank of China, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission and the State Administration of Foreign Exchange jointly released the Opinions on Financial Support for Hainan’s Comprehensive Deepening of Reform and Opening-up. This document states that Hainan will enhance Renminbi convertibility, improve the financial market system, further open up the financial industry, accelerate the innovation of financial products and services, raise the standard of financial services, bolster financial regulation and guard against and defuse financial risks. Measures to achieve these include exploring a pilot scheme of cross-border asset management business, exploring the relaxation of personal cross-border transaction policies, supporting the establishment of a China-foreign joint-venture bank, gradually expanding the scope of cross-border asset transfer, issuing of RMB-denominated asset-management products overseas, and supporting the development of real estate investment trusts in the housing rental field.

Hong Kong’s legal and accounting services can enjoy more relaxed market access with less cross-border service restrictions in the Hainan Free Trade Port. Currently, foreign companies are not allowed to invest in Chinese legal affairs or become a partner in mainland law firms; foreigners cannot sit the national examination to acquire a qualification certificate as a legal professional. But according to CEPA, a Hong Kong law firm can form an associated law firm in Hainan with a Hainan law firm (with the shareholding of the Hong Kong party not exceeding 49%); and Hong Kong permanent residents can sit the said examination and qualify as a mainland legal professional. Likewise, overseas service providers can only provide agency bookkeeping services through a commercial presence, whereas, according to CEPA, Hong Kong accountants can work in an agency on the mainland that complies with the mainland’s Measures on the Administration of Bookkeeping Services (Chinese only) and engage in agency bookkeeping business. The market access and cross-border service restrictions on Hong Kong’s legal and accounting services are obviously more relaxed.

In recent years, the development of Hainan’s legal and accounting services has mainly focused on the establishment of related facilities and systems. The International Mediation Centre for Commercial Affairs at the Hainan International Arbitration Court and the Hainan Free Trade Port Intellectual Property Court were formed in 2020 and 2021 respectively. The General Office of the People’s Government of Hainan Province also issued guiding opinions in 2019 to eliminate the lists of qualified accounting firms prepared individually by various departments localities. Instead, it stipulates that, for service fees of over RMB2million, the selection of accounting firms should be carried out through open tender. Such arrangements should help with the opening up of Hainan’s legal and accounting services sectors.

According to the Opinions of the Supreme People’s Court on the Provision of Judicial Services and Guarantees by the People’s Court for the Construction of Hainan Free Trade Port (the Opinions, Chinese only), Hainan will implement reforms of “three-in-one” (civil, commercial and criminal) trials in maritime affairs, improve the mechanism for the centralised trial of cases involving international commercial disputes and comprehensively implement cross regional jurisdiction in the trial of administrative cases. The Opinions also encourage the participation of foreign mediators and mediators from Hong Kong, Macao and Taiwan in the resolution of disputes; and the bringing in of renowned international commercial arbitral bodies and international commercial mediation organisations. For the accounting sector, the Outline of the 14th Five-Year Plan for Accounting Reform and Development (Draft for Public Comments) (Chinese only) issued in April 2021 pointed out that the profession will comprehensively implement all CEPA agreements, actively participate in the establishment of the Free Trade Port and will continue strengthening cross-border co-operation in regulating accounting and auditing work with other countries or regions.

To build a high-quality free trade port, Hainan needs a large pool of talent in construction and engineering design and planning, which are the sectors where foreign investment is encouraged. However, certain restrictions are in place for overseas service providers to the mainland construction and engineering sectors. Foreigners’ applications to sit China’s national architects’ examination and to register as such, and foreign architects’ applications to engage in the business of registered architects shall be handled in accordance with the reciprocity principle. However, under CEPA, the handling of Hong Kong professionals sitting China’s national architects’ examination and registering as such is not subject to the reciprocity principle. Hong Kong professionals may also be granted an architect’s qualification on the mainland through the mutual recognition of qualifications arrangement.

In recent years, in fostering new technology applications and green development, Hainan has vigorously promoted the use of prefabricated construction (also known as “modular integrated construction”). In the Circular of the General Office of the Hainan Provincial People’s Government on Accelerating the Development of Prefabricated Construction promulgated in 2020, it is stipulated that by the end of 2022, prefabricated construction shall be adopted in not less than 80% of projects under the annual commodity housing plans of cities and counties. The Circular on Matters Related to Further Promoting the Steady Development of Prefabricated Construction released in 2021 further specifies that negative list administration will be implemented for non-prefabricated construction starting 2022, whereby new industrial construction projects with a total construction area of less than 5,000 sq m or comprising a single building with an area of less than 2,000 sq m will be allowed to be built using the non-prefabrication construction method. The government’s immense efforts to promote prefabricated construction are expected to encourage the construction and engineering industries to adopt new technologies.

Under the CEPA framework, Hong Kong service providers and healthcare personnel wishing to gain access to Hainan’s medical sector or engage in cross-border services are less restricted. Hong Kong service providers may set up wholly foreign-owned medical institutions, while the 12 categories of statutory healthcare personnel who are registered to practise in Hong Kong may also practise on the mainland for as long as three years, longer than the one-year period allowed for foreign doctors in Hainan. Meanwhile, efforts are being made to promote the internationalisation of Hainan’s healthcare security system. In the Implementation Opinions of the Hainan Provincial Party Committee and Hainan Provincial People’s Government on Deepening the Reform of the Healthcare Security System, it is stated that in 2021, Hainan will allow those who have obtained a residence permit to participate in basic medical insurance in the province and enjoy the same medical insurance treatment as nationals.

Currently, Hainan’s efforts to open up its medical sector are concentrated in the Boao Lecheng International Medical Tourism Pilot Zone (please refer to Hainan Free Trade Zone (3): The Burgeoning Medical Tourism Sector). Going forward, the medical sector is expected to be further opened up across the entire Hainan Free Trade Port. Under the Plan on the Pilot Programme to Further Expand the Opening-up of Hainan’s Services Sector (Chinese only) unveiled by the Ministry of Commerce, support will be rendered to Hong Kong and Macao service providers to establish wholly-owned medical institutions. The Opinions of the National Development and Reform Commission and the Ministry of Commerce on Several Special Measures for Supporting the Construction of the Hainan Free Trade Port and Relaxing Market Access further states that manufacturers will be encouraged to produce their first unit (set) of high-end medical equipment in Hainan. Overall, in boosting its medical sector, Hainan will take measures to foster medical tourism and scientific research in the Boao Lecheng International Medical Tourism Pilot Zone, assist Hong Kong companies in establishing wholly foreign-owned medical institutions in other parts of the province and strengthen R&D in medical equipment.

Among Hainan’s policies on foreign investment access and cross-border services in the information and communications technology sector, of particular interest is the permission for enterprises with registered entities and service facilities in the Hainan Free Trade Port to engage in businesses such as internet data centres and content distribution networks to serve the entire free trade port and the global market. This is the first time that such permission has been given in a negative list on foreign investment access. Under CEPA, Hong Kong companies must make use of a joint venture to provide internet data centres and content distribution network services on the mainland, with the Hong Kong party holding no more than a 50% share. In the Smart Hainan Plan (2020-2025) (Chinese only) released by a leading group’s office under the State Council established to promote deepening of reforms and opening-up of Hainan, it is specified that Hainan will “build China’s first international data centre for launching international data services”. Given this overall policy, Hainan is expected to not only open up its internet data centre and content distribution network businesses to foreign investment, but also specify a share ratio similar to or even preferential to that under CEPA, in a bid to draw international investment to the province.

In recent years, Hainan’s internet business has developed in leaps and bounds. According to the Hainan Provincial Department of Industry and Information Technology, the province’s internet industry generated a revenue of RMB120 billion in 2020, with annual growth averaging over 30% between 2016 and 2020⁴. This may be attributed to the province’s great strides made in developing its information technology infrastructure. In April 2021, a dedicated international internet data line was launched at the Hainan Free Trade Port, which was the first such data line in China built at the provincial level. Covering nine industrial parks in Hainan, including Haikou Fullsing Internet Industrial Park, Sanya Internet Information Industrial Park and Hainan Boao Lecheng International Medical Tourism Pilot Zone, the data line provides enterprises in the parks with faster and more reliable internet services, helping enterprises to expand their internet business. Moreover, in September 2021, the installation and testing of the optical fibre submarine cable network connecting Hainan with Hong Kong – the Hainan to Hong Kong Express (H2HE) – was completed, with the network expected to commence operation soon. Such initiatives in building infrastructure have laid a solid foundation for the internet industry and other sectors to further develop and upgrade themselves.

Under CEPA, Hong Kong companies are entitled to more preferential treatment in the cultural sector. For instance, Hong Kong companies may set up wholly-owned enterprises, equity joint ventures or co-operative joint ventures with mainland partners to engage in the production of video and sound recording products. Hainan’s current efforts to boost its cultural industry focus on developing cultural products related to tourism (e.g. increasing the number of cultural and artistic performances). According to the Circular of the Ministry of Culture and Tourism on Deepening Reform of Streamlining Administration, Delegating Power and Improving Services to Promote the Prosperous Development of the Performance Market promulgated by the Ministry of Culture and Tourism in 2020, foreign-owned performing arts groups with the Chinese party holding a controlling stake may be established by foreign companies in all free trade zones (ports) upon submission of the application materials to the provincial-level culture and tourism administration department at the free trade zones (ports).

The cultural industry is an important component in Hainan’s endeavours to build a modern services sector. Under the Opinions on Special Measures for Relaxing Control over Market Access to Support the Construction of Hainan Free Trade Port jointly released by the National Development and Reform Commission and the Ministry of Commerce in April 2021, support will be rendered to building an international art trading centre in Hainan to encourage international and domestic auction houses to establish a presence there. Although there are still restrictions on the access of foreign (including Hong Kong) heritage auction companies to the mainland, such restrictions may be eased in light of the above policy.

Conclusion

Two observations can be made from the developments of the various industries outlined above. First, in fuelling the growth of different sectors in the Hainan Free Trade Port, the central and Hainan governments strive first and foremost to put in place the proper institutions and infrastructure. Although investment promotion measures like tax exemption will be implemented in some sectors (like manufacturing and processing), such measures are to prepare for island-wide independent customs operation in the future. It has been a year or so since the release of the Overall Plan in 2020, and the government is constantly fine-tuning the relevant institutional arrangements (such as allowing individuals who have obtained a residence permit to join basic medical insurance schemes in Hainan) and putting up the requisite facilities (like establishing the Hainan International Arbitration Court International Mediation Centre and the Haikou Airport Comprehensive Bonded Zone). Hainan’s business environment is set to mature in the run-up to 2025. While those who make an early entry may have the first-mover advantage in some sectors, the late comers can enjoy a more convenient and conducive business environment as institutions and facilities continue to be enhanced.

Second, the Hainan Free Trade Port will pursue diversified industrial development. Although pilot reforms of the logistics and healthcare sectors are being carried out in Yangpu and Boao Lecheng respectively, other industries are not being overlooked, as evidenced by various industries’ new developments in recent years as outlined above. Given Hainan’s vast area, the integrated development of different industries is crucial to constructing a vibrant free trade port. While tourism is the most prominent sector in Hainan now, the province’s industrial structures are set to diversify. Hong Kong and foreign companies venturing into Hainan can consider participating first in tourism-related sectors before expanding their business portfolio as circumstances change.

For Hong Kong and foreign companies making forays into Hainan, in addition to engaging Hong Kong professional consultants in devising a detailed business plan, consideration may also be given to approaching the Hainan Provincial Bureau of International Economic Development (IEDB) for assistance. A non-profit legal entity inaugurated by the Hainan Provincial People’s Government, the IEDB is tasked with attracting foreign investment and offering international business services. Enterprises can look to the IEDB for on-the-ground support for their investment in Hainan.

¹ To have an understanding of the restrictions on market access, operation and cross-border services, or to have a better knowledge of the list of encouraged industries, please refer to Hainan Free Trade Zone (1): Background and Positioning.

² The English translation in this article is for reference only, please refer to the Chinese version for the authentic version.

³ The objective of the new land-sea corridor is to strengthen the land and seas transportation network for the provinces, municipalities and autonomous regions in western China so that domestic and international trade and logistics and logistics channels are more open, which would in turn contribute towards the development of the national economy and the Belt and Road Initiative.

⁴ Source: The fourth in a series of press briefings on Hainan’s achievements under the 13th Five-Year Plan held by the Hainan Provincial Information Office on 14 January 2021.