From the perspective of a pessimist, Hainan’s transformation into a free trade port (FTP) could pose a threat to the leading position of Hong Kong as China’s top free trade port. But from the perspective of an optimist, Hong Kong’s businesses and professionals should embrace the special and preferential policies for Hainan because there is no better time than the present to capture these golden opportunities.

At present, Hong Kong is Hainan’s major investment partner, owning 75.3 percent of the total used foreign direct investment (Giulia Interesse, Investing in Hainan: Industry, Economics and Policy, posted by China Briefing). The Hainan FTP plan deserves our support because the success of the plan will further validate China’s developmental model amid heightened geopolitical competition between China and the US.

2020 was a milestone year for Hainan. Over the years, more than 180 policies and measures on tariff exemptions and trade and investment facilitation have gone into effect to support the development of the Hainan FTP. In the following discussion, the zero-tariff regime and preferential tax policies will come into particular focus because they are conducive to China’s participating in global trade and attracting quality foreign investment.

The zero-tariff regime will be established by 2025 in two stages. In the first stage (pre-2025), certain categories of imports are entitled to zero-tariff treatment to support the development of the tourism, e-commerce and logistics industries in the Hainan FTP. Zero-tariff treatment covers equipment imports by Hainan’s enterprises for their own use (subject to a negative list), and imports of vehicles and vessels used for transportation and tourism in Hainan (with reference to a positive list). Supported by zero-tariff policies, Hainan has the potential to become a yacht trading center in the Asia-Pacific region. Besides, imports of yachts are exempt from the import value-added tax (VAT) and consumption tax (Giulia Interesse, op.cit, p7).

In the second stage (from 2025), a separate tariff regime will be developed for the Hainan FTP, meaning that zero tariffs will apply to a wide range of imports based on a catalog system. Import VAT and consumption tax exclusions may also apply. The zero-tariff regimes aim at reducing Hainan’s dependency on traditional sectors, such as tourism, the oil and petroleum industry, and agriculture and fisheries.

One notable difference between the Hainan FTP and other customs special supervision zones in China is its special import processing policy. Under this, goods can be imported zero-tariff to Hainan, processed in Hainan, and then sold to elsewhere in China at zero-tariff. This provides significant access to the Chinese mainland market and opportunities for supply chain optimization (Bin Yang, Eric Zhou and Nicole Zhang, China’s Hainan Free Trade Port: Introducing an Innovative Tax Regime to Attract Investment, in “KPMG International Tax Review”).

Hong Kong’s businesses and professionals should embrace the special and preferential policies for Hainan because there is no better time than the present to capture these golden opportunities

A key requirement is that the processing conducted in Hainan needs to meet a 30 percent value-added threshold and that a “Hainan origin certificate” is obtained for goods. The above measures will close the floodgates to shell companies wishing to abuse these policies by establishing deceptive footholds in Hainan. Decision-makers harbor great ambitions by relying on these special import processing policies to support the establishment of high-end industries on this tropical island, facilitating Hainan’s integration into the global supply chains.

Preferential tax policies have also come onto the radars of foreign businesses. One of the attractions of the Hainan FTP plan is the low corporate income tax (CIT) and individual income tax (IIT) rates. Unlike China’s average CIT rate of 25 percent, the Hainan FTP offers a reduced 15 percent CIT rate to “encouraged industries” for the period to 2025. “Encouraged industries” that can enjoy the special CIT rate have recently been clarified by China’s Ministry of Finance and State Taxation Administration (KPMG International Tax Regime, ibid).

Unlike China’s average marginal individual income tax (IIT) rate of 45 percent, the Hainan FTP offers a maximum 15 percent IIT rate for income of personnel with high-end and urgently needed skills. From 2025 to 2035, the Hainan FTP will limit the progressive IIT rates on comprehensive income and business income to 3 percent, 10 percent and 15 percent. The Hainan FTP also claims credit for providing IIT incentives that are more preferential than those offered in the Guangdong-Hong Kong-Macao Greater Bay Area in some respects (Giulia Interesse, op.cit, p14).

The willingness of some international brands to establish a foothold in the Hainan FTP has lent credence to the claim that the zero-tariff and preferential tax policies are extremely attractive. That is why jewelry brand De Beers Forevermark only took one month to settle in Hainan. Sotheby’s, General Electric, France’s Kering Group, Singapore’s leading medical group Raffles, Japan’s Lawson and other big companies have also poured investments into Hainan (Hainan: From a Southern Island to a Free Trade Port, in Cision).

Another asset of Hainan is the close personal ties between Hainan and some leading figures of ASEAN states that may help forge stronger economic links between Hainan and these Southeast Asian states. Singapore minister politicians Lawrence Wong, Lee Chiaw Meng, Cedric Foo, Yu-Foo Yee Shoon and Mah Bow Tan can trace their ancestries to Hainan. Lawrence Wong is highly likely to become the next prime minister of Singapore. Yu-Foo Yee Shoon was one of the longest serving female politicians in the city-state. The ninth prime minister of Thailand, Pote Sarasin (from September 1957 to January 1958), can also trace his ancestry to Hainan. The famous Chirathivat family, which owns and manages the Central Group, is a Thai family of Hainanese descent.

We cannot underestimate the economic potential of ASEAN states. Projections show that the ASEAN economy will be larger than that of Japan by 2030 (Kishore Mahbubani, Asia’s Third Way, in Foreign Affairs, March/April 2023). Nor can we underestimate the economic growth engine provided by the Regional Comprehensive Economic Partnership (RCEP) framework. Being the world’s largest free trade agreement, RCEP will spur more significant jumps in economic growth in Hainan.

Hong Kong should not sit on the golden opportunities offered by the Hainan FTP. In addition to the new opportunities offered by the zero-tariff regime and preferential tax policies, Hainan also enjoys a competitive edge in its traditional sectors. Tourism and agriculture are the traditional jewels on the crown of Hainan’s economy. These investment opportunities should not escape the attention of Hong Kong’s investors.

Jimmy Lam Pok is the deputy secretary-general of Kowloon Federation of Associations, and co-director of public policy and district administration of Chinese Dream Think Tank.

Kacee Ting Wong is a barrister, part-time researcher of Shenzhen University Hong Kong and Macao Basic Law Research Center, and chairman of Chinese Dream Think Tank.

The views do not necessarily reflect those of China Daily.