Investing in China has long been a goal of foreign investors, but opportunities are often subject to the many legal complications. In sharp contrast, special economic zones (SEZ) have provided light legal requirements and financial incentives in the form of preferential tax and trade policies. In fact, each Chinese free trade area (such as Shanghai, Guangdong, Tianjin and Fujian) has its own mission and unique characteristics. Hainan is the latest free trade area to be developed.

Launched in 2018, China's massive Hainan free trade port (Hainan FTP) project has many advantages. According to the master plan released in June 2020, the FTP will have three distinctive features. First, it will follow a zero-tariff policy for most of its imports, including “manufacturing equipment, vehicles, raw materials and consumer goods”. Second, there will be a special focus on tourism, services and the high-tech sectors – to this end, the plan has listed favourable corporate tax policies in these areas. Third, the project also aims to attract skilled foreign talent to work in Hainan. 

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Hainan FTP is a game changer. Designed to be the largest free trade area in China, it will cover more than 35,000 square kilometres, dwarfing Shanghai SEZ in comparison. Notably, Hainan FTP will also be much bigger than Hong Kong, a special administrative region that has its own rights and obligations under the WTO and many other international treaties. However, Hainan FTP will not be immediately subject to any international rules, which may raise some legal issues for China. 

More liberal

Hainan is not only bigger than other Chinese SEZs, the level of market liberalisation it introduces goes further than usual as it will open up the trade of services by implementing a ‘minimum approval’ investment system. This system will comprise a special market access list relaxing market access for Hainan FTP. Additionally, a negative list approach, which defines the economic areas restricted to foreign investment, will be adopted in the free zone. 

The overall goal is the establishment of a fully functional free trade port by 2035, which will be able to compete with Hong Kong and Singapore, while retaining “Chinese characteristics”. Many policies have been announced so far. However, they must be complemented by implementation documents, which are likely to be released in the coming months and will gradually give clearer indications as for the direction taken by the Hainan FTP. 

With more SEZs under construction, China continues to be one of the best places in the world to invest because of its SEZs. Hainan promises to be at the vanguard for years to come, and confirms that China’s future FDI policy will heavily rely on SEZs. Faster options for starting businesses, preferential tax treatment and better access to previously prohibited investment sectors are the factors likely to bring investors to Hainan. 

Julien Chaisse is professor of law at the City University of Hong Kong

This article first appeared in the August - September edition of fDi Magazine. View a digital edition of the magazine here.