Hello, welcome to Roundtable where we serve up piping hot debates on the issues that sizzle in China and beyond.
I'm Niu Henglin.
Hainan is making headlines these days because of the island-wide special customs operations at Hainan Free Trade Port.
Behind the policy, language and tariff schedules.
We ask how does an abstract reform change daily life?
For businesses workers, investors and residents, Hainan's customs transition could be More than about trade, but cost opportunity, mobility and the kind of future the island is positioning itself to host.
For this episode, I'm joined by Yusheng and Lai Ming.
Now grab your virtual compass and follow us to the heart of the discussion.
The island-wide special customs operations at Hainan Free Trade Port began on December the 18th.
It's a major step in China's opening up strategy.
And honestly, the shift happening in Hainan is more about kicking off a whole new economic era.
Think of it as a complete institutional reboot for the entire island.
And for today's show we prepared a breakdown of what the island wide special customs operations mean, the policies launching alongside it and the impact across the board.
But let's start with the meaning of island-wide special customs operations.
For people outside of trade and logistics.
For me personally actually, I was quite confused about what this term means.
So the term island-wide special customs operations or in Chinese, it can be even more confusing.
It's got fengguan or full customs closure directly translated as in Chinese.
It might sound like the island is being sealed off.
But it's actually the opposite.
It signifies opening up at a higher, even broader and deeper level.
And the core concept is to turn the entire island into a special custom supervision area and essentially, a zone that is inside the country but outside the customs.
And that is why we're calling it a special customs operation.
Consider it repackaging.
Namely, you are repackaging, redefining the free trade port of Hainan as a front line or a outpost or bridgehead of China's opening up.
And so, On the one hand, you have the island being presented out there, being considered as somewhat international market.
I would consider that
Goods coming from overseas markets would enjoy much more facilitative entry.
The major benefit here is that most goods benefit from zero tariffs and simplified customs procedures.
And then there is the talk about the second line.
We just mentioned the first line, meaning it was in line with the international market.
And then the second line is the line between Hainan Island and the Chinese mainland.
And that boundary is regulated and supervised.
Goods moving from Hainan into the rest of the Chinese mainland are subject to standard customs supervision.
And this is mainly to ensure fairness and prevent major risks, like smuggling, associated with the highly preferential policies on the island.
So, in other words, goods moving from Hainan Island into the Chinese mainland will to some extent be considered as will be treated as imports, with tariff exemptions in many cases.
I almost stopped liming right there because I hear the keyword free zone or free trade or zero tariff.
What's that?
It sounds exciting.
This is one of the biggest policies that is going to be released or it is releasing in Hainan.
The list of imported goods eligible for the zero tariffs is expanding dramatically.
The proportion of products enjoying zero tariffs will jump from 21 to about 74 of all the tariff lines.
And Cai Qiang, who is the head of the Hainan Provincial Department of Finance, said that after this special operation, the number of goods subject to zero tariffs will increase to around 6600 tariff lines, covering nearly all production equipment and raw materials, and this is expected to help companies importing equipment cut their tax costs by about 20 percent.
That is a solid um save for their money.
And that is not the only good news these enterprises from overseas or locally are listening to or hearing about.
Another one is called a 30% value-added rule.
This policy is getting also a major upgrade.
It means if products are processed in Hainan and 30 or more of their value is added on the island of Hainan, they can be sold directly to the Chinese mainland duty-free.
And crucially, this policy expanding from pilot programs in specific areas and industry to cover the whole island.
And I actually searched some of the examples on how can we really understand this policy or what does that 30 really mean?
How can you add that value in that island?
So one example is that a batch of Argentine beef worth around 356000 yuan and that's around like 50 000 us dollars, and they would normally be subject to almost 43 000 yuan in duties at a like 12 tax rate because you're moving them across the customs.
Yes, if you uh import it directly to mainland china and then after this hainan free trade port rules, if the beef is processed into, let's say, jerky in hainan and sold to the mainland for around 500 000 yuan, And then the 43000 yuan tariff can be weaved because it's processing value added rate and is greater than 30.
In other words processing industry.
When the meat is imported to the Hainan Island, when it's cut, marinated and processed and then sold to the Chinese mainland, it is duty free.
Not to mention certain factories might only do the job of ensemble stuff together and they do not have to, technically speaking, make anything.
But still they can enjoy this 30 value added rule so that they can sell their product to the Chinese mainland without any problems.
So for businesses, this means access to the Chinese mainland at much lower cost in the form of tariffs.
And also there's regulatory streamlining, meaning that documents detailing tax policies across the first line and second line Lai Ming has just mentioned rules for customs supervision and list of goods prohibited or restricted from import, export will all come into force and they are also making import simpler.
And all these are still still they are on the paper.
They are the rules and policies and even if even after Yusheng has already provided a very vivid example, we still Wanted to have a closer look at what the policies are doing to enterprises from outside of the island and also locally, what is happening in the island.
But let's start with the overseas companies.
Let's say I am an overseas company and I wanted to invest.
I wanted to operate.
I also wanted to cooperate with local companies. acted policies.
Obviously, cost reduction is one of the benefits that you are going to get as an importer, or importer right.
As an investor or business owner.
Yes.
So companies can import production equipment and raw materials at a significantly lower cost, improving their profit margins and accelerating their global expansion.
And one example can be yacht manufacturers.
If you are trying to sell yacht here in China, you can benefit from the policy.
And a CGTN report saying that for yacht manufacturers, exemptions on import tariffs and value added tax for equipment and raw and auxiliary materials could reduce costs by about 20.
When selling in the domestic market.
Qualifying for processing value-added tariff exemptions could further reduce costs by around 6.
And this will give yachts made in Sanya a clear advantage in quality, price and service over competitors abroad or even other parts of China.
And Sanya is a city in the island of Hainan which, And the whole thing is expect to draw more domestic and international yacht manufacturers and repair companies to set up operations on this island, which means we'll have more opportunities to invest and cooperate and operate companies in the island.
Right, right.
And Hainan is an island province of its own.
And so for many years it's been trying to promote tourism there, inbound tourism, as a major pillar of its economy.
So I imagine that if a business focusing on manufacturing yacht were to set up base, I bet there already are a lot of businesses in this regard.
If they were settled there, if they are seeking further development, i think the island already is in a good position to absorb the actual output and then this will also present a huge advantage for the industry compared to for instance enterprises in the chinese mainland if not all over the world yes and i as a very successful businesswoman who's Let's say companies cover the sectors such as biopharmaceuticals, offshore wind power, specialized vehicle manufacturing, and green building materials production.
Wow, I do a lot of different things.
And because I cover those areas, when I wanted to register and operate sustainably here in Hainan and engaged in encouraged industries, which are, you know, my industries are the encouraged industries.
We are subject to a corporate income tax rate of just the 15.
And that number is capped at 15%.
Yes, it's capped at 15% and lower.
And that is compared to the 25% on the Chinese mainland and the 16.5% in Hong Kong.
So I am enjoying a huge tax deducts, in my opinion.
And yes, that is another corporate-related corporate income rate for specific encouraged industries in Hainan.
Another very interesting thing is that In Hainan, individuals listed in these encouraged industries individual talent are also their personal income.
Tax is also capped at 15.
And that is also below Chinese millions top rate of 45%.
So no matter if you're an individual working in these industries and gaining your profit through certain kind of contract or certain kind of cooperation with other companies, or you're a successful business woman like myself,
Well, that example just goes on.
You are investing in Hainan and you are operating here.
You can enjoy another kind of really great subsidies or the kind of preferential policy.
And when you are like importing goods into China and normally you need to go through various customs procedures, declarations and complete multiple procedures, even in other like bonded zones within China.
Right.
Handling these formalities usually take you like two to three days.
But in the Hainan free trade port, except for a few special cases, business now only need to make a self declaration through the local public data service platform, with no separate filing required.
And based on some real tests by some practitioners, the entire process can be completed in as little as half an hour.
Since we're talking about these different paperwork and process, another interesting example happened in the area of biotechnology firms, because they need to import genetic or biological resources.
And when they do that in Hainan, they face lower risks and they can streamline the process because Well, if you really think about it, it's still an island.
It's easier to control, meaning that and also they have the policies there.
They have been looking into this industry.
And if you are doing it there, we get to see that they can face a very much facilitated, streamlined inspection and quarantine procedure right.
Another aspect that i'd like to stress is the um, the potential to try and boost productivity within the island, and i would like to begin with some extra information about personal income tax here in the chinese mainland.
We mentioned the percentage of 45, but that's actually the maximum percentage on individuals earning more than 960 000 yuan a year, But in fact, the income tax in the Chinese mainland begins at only 3 for individuals earning fewer than 36000 yuan.
And it's a tiered system.
And for those earning 36,000 to 144,000 yuan, the percentage is 10%.
So, comparatively speaking, residents and high-end talent living and working in Hainan Island, they have their personal income capped at 15.
So I think this means that a high-end talent, high-income people, they can benefit a lot more on High Island as compared to people working in the Chinese mainland.
In the meantime, the 30 value-added rule also means that a lot of businesses are trying to, they will have to, or they will want to try and step up their productivity, because anything Any added value added that they are able to come up with beyond 30 will be duty free.
So over.
In the long term, I think this is going to encourage the local industries to upgrade rather than being stuck with low end and low value added tax industries.
We see that the advantages also extend further to bonded storage and processing.
Because elsewhere in China, such activities must be confined to designated areas, designated zones.
Because yes, we still have some other free trade zone areas in Shanghai, in the Greater Bay Area.
But we see that in Hainan, companies can choose processing locations anywhere on the island.
Because the entire island is a free trade port and with no storage or time restrictions, and within with a land area exceeding 35 000 square kilometers, that is, more than 70 times the combined area of china's 156 comprehensive bond zones.
We can see, Hainan offers unmatched special flexibility for overseas companies for sure.
But it's not only for overseas companies, not only for overseas investment.
It is benefiting or beneficial to local companies as well.
Yeah, all of these policies and beneficial policies.
They are attracting talents into these free trade port right.
And no matter you're from maybe another part of Chinese mainland or in China, or you're just international visitors there.
This is expected to upgrade from a basic, just sightseeing model to the island to an international resort destination the whole island and the combination of zero tariffs on consumer goods and expended category of these duty free items up to, as we said, 6600 tax items.
And the visa-free policy for 85 countries will attract global visitors seeking their high-end vacation experiences, medical tourism and duty-free shopping.
And as we mentioned, let's say the zero tariff policy for imported yachts, right?
Yixuan likes yachts.
I kind of, yeah.
That kind of experience.
But anyway it will potentially save a company importing 10 million yuan yacht roughly 40 in tariffs.
And think about that.
That could be a really, really attracting point for a lot of companies to get into that area.
How about high tech and advanced manufacturing sector?
Do we see any preferential policy?
Because around the world or here in China, we get to see it's been stressed that we want these kind of high tech to be able to further power industries.
Biomedicine, digital economy and new energy industries are certainly industries that the island province is trying to attract to the region.
Low tax policies and zero tariffs on materials dramatically reduce operational costs and therefore would foster a shift towards high quality development.
A good example is the expanded zero tariff coverage directly benefiting key sectors like high-end food processing and medicine.
The 15 corporate income tax we just mentioned earlier would create a pull for these companies as well.
Another example is a Hainan-based rubber processing firm can expect to save 37800 yuan in tariffs on just one 42-ton shipment of natural latex due to the 30 value-added rule.
And so that would really add up quickly for the company with the high annual capacity.
How about for individuals?
Because when I hear about the news, when I started preparing for Roundtable today, I have this urge to you know spend my annual leaves and book a ticket to Hainan and enjoy.
And I know when I'm there, I get to purchase a lot of duty-free goods.
Yes, the cap is still 100,000 yuan.
I can still take that worth amount of or that value. of goods from Hainan duty free.
If I spend too much money that I don't really have there, I still have to pay for tax.
But still I get to choose from not 1000, around 1000 types of stuff, of goods, but from more than or around 6600 different items.
So I would love to go.
But besides that, what am I looking forward to?
More enhanced international lifestyle, or maybe even infrastructure and equipment that you can expect.
Because with all of these facilities that is getting into that area.
The thing is that we will see international visitors there and international infrastructures will be built there.
And the continuous improvement of facilities like international schools and hospitals contributes to a more appealing and international living environment.
And one example is that In this September, following the opening of the permanent campus of Hainan Bellafold University if I'm pronouncing that right of applied sciences, which is the first independently run overseas university established within Chinese mainland.
And the EHL Hospitality Business School was also officially inaugurated and began classes in Sanya.
And this marks the first time Switzerland's EHL group has independently established a higher education institution outside its home country.
Yeah, we mentioned a lot about preferential policies, trying to attract businesses and investors to set up shop there and try and benefit from the policies.
But then now with the industries.
If these policies were truly successful, going forward we are going to see an increase of businesses, both Chinese and international, and I imagine will be a lot of international businesses there and as such, relevant industries, relevant services will have to go with the demand of talent being attracted to these businesses.
So international schools and hospitals there will be need for that as well, and the local residents can also benefit from the presence of these institutions.
I have a friend is currently traveling in Hainan.
I've already seen her like posting on in her moment saying that wow, there are so many campaigns going on and I can.
I just got my ideal lipstick, I would say, with a really, really good price.
So I assume there's going to be a lot of very low consumer prices for a lot of these commodities.
And this broad zero tariff policy on imported goods is expected to lower consumer prices as well.
And Zhou Zheng, who is the deputy director of the Hainan Provincial Department of Finance, also saying that, As long as local residents have at least one record of leaving the island within a year, they can make unlimited purchases of 15 categories of buy and collect immediately goods including cosmetics perfumes, clothing and bags.
Wow, just go shop there.
Well, when it comes to the development of a city or a region or an area, we think about the elements, the core elements goods capital, people and data.
If you take a look at situations around the world.
In China and around the world, Hong Kong excels at activating capital, building its role as an international financial hub.
Singapore has mastered the flow of goods as one of the world's busiest ports.
It handles roughly one fifth of global trade flows and Dubai focuses on people.
And in even just in 2019, before Well, we see that it welcomed more than well almost 17 million international travelers.
That's more than five times its resident population.
But here in Hainan, I think, with the free trade port, with the entire island acting as a buffer zone for goods, for talent, for data.
Data collecting would be a future task.
I'm assuming we get to see the potential of the island.
But that is not to say there's no challenge.
There's no problem that we need to definitely solve.
There's no hurdles probably to jump over.
There's no potential risks that the local government is definitely already looking at.
So what can be some potential challenges?
I'm thinking financial risks because, with increased financial flexibility and the flow of capital is made easier through multifunctional electronic fence accounts, and these accounts act much like offshore accounts, with fewer controls on sending and receiving money from abroad, and this will help facilitate cross-border investment and operations.
But, on the other hand, with the greater freedom in capital flow, there is an increased risk of issues like money laundering and capital flight and therefore more pressure on the authorities to step up their supervision, and they need to establish a comprehensive microprudential plus precise regulation system to strengthen cross-border financial risk monitoring.
The other thing I can think about is the kind of competition that the local residents will have to survive, because we mentioned a lot about attractive policies trying to lure top businesses and talent into the region.
But like many developed cities that we already see in the Chinese mainland, in Shanghai and Beijing, these first-tier cities, oftentimes you see the locals having to settle with very basic jobs like taxi hailing services that kind of thing so Hainan is not particularly well known for his education, educational resources and capacity.
So what to do with the local residents and their offsprings and how do the locals help them?
How do the authorities help the locals grow and just survive?
The competition is something that they have to think about.
And since we're talking about that, I think infrastructure construction is also one of the points that people need to consider.
Although the island wide high speed railway is already in operation, cross sea transportation still relies mainly on aviation and ferries, making connectivity with the mainland less difficult, convenient than places like Hong Kong.
So logistics costs within the island also remain quite high and, more specifically, specialized facilities such as cold chain storage are still not that sufficient, and reducing logistics costs will be crucial to supporting trade in some high value-added goods.
As a result, some companies registered in Hainan may continue to keep their operational headquarters in cities like Guangzhou and Shenzhen in this Greater Bay Area.
I've heard of an interesting theory saying that because geographically the island is naturally isolated And it's kind of a both physical and regulatory island,
Abnormal flows of goods, capital or data can be monitored easier, can be contained more efficiently and in island-connected zones than in island-connected zones.
And also because we see that the economically high-end scale is relatively small, with a 2024 GDP of a little less than 800 billion yuan that is less than one-third of Hong Kong's at that year.
So the theory is that we're testing it out.
We're using this area as a test bed to see if we can further open up to the international market.
We can open up in a larger scale in different aspects, and if this can be a successful case.
We are doing it more in more places and we are further trying to be globalized and trying to cooperate with more countries in more aspects, with more different ways.
What's your take on this theory?
Well, I think we have to match the humble beginning of the island province with the grand vision that the special customs operation is hoping to achieve.
And so there's many steps in between, a lot of hurdles to jump through.
But I think it's important to know that it's an announcement, it's a sign.
It's a sign of China's commitment to further opening up, with the preferential policies being introduced in the island province.
You can imagine similar industries, for instance, the yacht industry that Yushan speaks so much of.
Those on the Chinese mainland.
They will have to face competition from their peers that do set up shop in the island.
And so they will have to think of other ways to stay competitive.
They have to find their own niche.
But then I consider this as a pressure to now that you have less of a pressure or more of a pressure, because we created a difference or disparity between Hainan and the Chinese mainland.
Some changes are bound to take place.
Some flows are going to are going to appear.
And so the rest of the country will also have to be creative and thinking out of the box in terms of freeing up their own policies, changing their own way of doing to help their own industries stay competitive.
So whether or not China would continue to copy and paste the Hainan mode is something that Roundtable is keen to observe.
But for now, let's celebrate and enjoy Hainan.
