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Author: Ngeow Chow Bing, University of Malaya

Hainan has an important security function in the South China Sea — it is the province in which Sansha city claims to administer the disputed features of the South China Sea.

Hainan plays three significant roles in the South China Sea dispute. It helps to legitimise China’s territorial and maritime claims, defines China’s interests, and participates in asserting China’s national security. Its geostrategic importance, however, could complicate rather than enhance Hainan’s ability to promote China’s economic integration with regional players.

Hainan played a unique role in piloting China’s ‘reform and opening up’ period. Hainan was carved out of Guangdong province as China’s ‘youngest’ province in 1988 at the same time as it was designated a ‘special economic zone’ (SEZ).

Hainan SEZ carried a special mission to test the political–administrative reforms of ‘small government, big society’. Hainan’s bureaucracy and administrative hierarchy were streamlined to facilitate a more accommodative environment for civil and business actors.

Yet in the decades since, Hainan has failed to impress economically after a series of inconsistent economic strategies stopped it from developing a growth-enhancing core industry. The province formulated a strategy emphasising heavy industry in 1994, only to abandon this a few years later to focus on maritime and information industries.

In 2009, the State Council initiated a focus on developing tourism, but in 2014 Hainan proposed to make itself into a regional logistics hub. Hainan’s much touted ‘small government, big society’ reforms proved to be a modest rather than game changing policy, especially since the province still suffers from brain drain and consequently lacks talented professionals.

Hainan has since been promised another grand initiative to turn around its prospects. In April 2018, the State Council promoted a new ‘deepening of reform’ initiative in Hainan, followed by the announcement of a new Hainan Free Trade Port (HFTP). The HFTP bears the imprints of Chinese President Xi Jinping’s grandiose style of regional development through long-term planning and construction.

The HFTP has four roles. It will be a pilot zone for all-round reform and opening up, a pilot zone for ecological conservation, an international tourism and consumption destination, and a service zone for implementing China’s major economic strategies.

The free trade port status of both Hong Kong and Singapore serves as a model for the HFTP. Hawaii also serves as an inspiration due to its renowned status as a tourist destination. But the HFTP is more than just a vision to establish a trade and tourism hub — it will be integrated with the overall developmental strategy of China.

The master plan for the HFTP was released by the central government in June 2020 before being passed by China’s legislature in 2021. The HFTP will create unprecedented market access for foreign investors by having the shortest negative list — the number of items restricted or prohibited to foreign investors — among China’s free trade zones. Investment in service industries such as tourism, medical services, finance and education are being particularly encouraged.

The HFTP will have a separate customs zone with its own tariff regime and structure. There will be ‘two lines’ governing goods coming in and out of Hainan. The ‘first line’ is almost completely open, allowing most goods to be freely imported and exported from the HFTP. The ‘second line’ more tightly regulates goods entering the Chinese mainland from Hainan.

In early April 2022, Hainan authorities quietly took the first step of ‘sealing off customs’ to transform HFTP into a completely separate customs zone by 2025. Tax rates will soon be simplified and lower than other parts of China, while the HFTP is scheduled to be fully functional by 2035.

There is now cautious optimism in Hainan that the HFTP is the chance for the island province to finally catch up with China’s economic powerhouse provinces. But questions remain as to whether HFTP will be constrained by Hainan’s weaknesses — including its sensitive role in the South China Sea.

Hainan’s location means that the HFTP’s most natural foreign partners, participants and investors are likely to be from ASEAN. ASEAN countries were the largest trading partner of Hainan in 2021, so China–ASEAN relations are crucial to the success or failure of the HFTP. This means the HFTP cannot thrive in a tense geopolitical environment.

Beijing is counting on the HFTP to lend positive momentum to deepening China–ASEAN economic ties. In Beijing’s eyes, a larger economic pie ultimately renders disputes in the South China Sea less important than economic cooperation between China and ASEAN. But China’s views are not necessarily shared among Southeast Asian claimant countries in the South China Sea.

Ngeow Chow-Bing is Director of the Institute of China Studies at the University of Malaya.

The post Hainan’s free trade makeover masks its geopolitical significance first appeared on News JU.

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