Deng Xiaoping was regarded by many as the ‘architect of modern China’ for his economic reforms to open up the country to foreign investors in the last two decades of the 20th century. China’s first free zones debuted in 1980, under his philosophy of “crossing the river by feeling the stones” – testing new methods before rolling them out across the country. 

Just over 40 years later, China is undertaking a similar strategy with its masterplan to transform all of the Hainan island province into a free trade port (FTP). Encompassing 35,000 square kilometres, it will form China’s largest special economic zone on completion in 2035.

“The Hainan FTP will act as a testing ground for liberalisation measures, with the government looking to balance market liberalisation and national security through careful design of market regulation and foreign investment in sensitive industries, such as telecommunications,” says Kyle Freeman, partner at Dezan Shira & Associates. “The Hainan FTP will provide opportunities for foreign investors in traditional industries, as well as opening new industries for early development.”

FTP master plan

The Hainan FTP is part of China’s “high-level opening and establishing of a new open economic system”, according to the ‘Overall plan for the construction of Hainan Free Trade Port’ released by the Central Committee of the Communist Party of China and the state council.

“Building a free trade port in Hainan is the fundamental requirement for establishing a new open economic system,” says the state council in the document released in June 2020. “Supporting Hainan to gradually explore and steadily promote the construction of a free trade port with Chinese characteristics and establish a free trade port policy and system is a major reform and opening-up initiative.”

The master plan includes a ‘minimum approval’ investment system to allow special market access across particular industries. For example, income acquired from new FDI in tourism and high-tech industry enterprises will be exempt from corporate income tax from 2025, and raw materials imported for production will be exempt from import duties, value added tax and consumption tax. The ‘minimum approval’ system also includes easing of approval requirements and streamlined procedures through electronic licensing.

“China has attempted to implement similar red-tape reduction and market access liberalisation measures with mixed success in recent years, so investors will likely be eager to see the details of implementation measures for Hainan’s new minimum approval system,” says Mr Freeman.

Long-term goals

A further element of China’s commitment to encouraging foreign investment was the 2020 National Negative List, which came into effect on July 23. Under the list, foreign investors are no longer prohibited from investing in air traffic control systems, and all equity cap restrictions in asset management and insurance have been removed. In free trade zones (FTZs), China has reduced the number of limiting measures down to 33, which is seven fewer than in 2019 and 62 fewer than 2017.

“The liberalisation measures in the Hainan FTP and 2020 Negative List are positive developments, but foreign investors have been somewhat underwhelmed by the liberalisations introduced in China’s FTZs so far, which shows in [the] relatively limited foreign investment in these FTZs,” says Mr Freeman. “The true measure of [the liberalisations’] effectiveness will be in the implementation.”

This article first appeared in the August - September edition of fDi Magazine.