Hainan has great prom­ise as trade cen­ter

Like Sin­ga­pore and Hong Kong, the is­land prov­ince will be­come a ma­jor fi­nan­cial hub, as well as a gate­way to In­dian, Pa­cific oceans

China Daily European Weekly - - Comment - By SUN DAN The au­thor is a re­search fel­low at the CEIBS Lu­ji­azui In­sti­tute of In­ter­na­tional Fi­nance. The views do not nec­es­sar­ily re­flect those of China Daily.

China aims to es­tab­lish a free trade zone in Hainan prov­ince by 2020, and a free trade port there by 2025 as part of the most proac­tive open­ing-up strat­egy of the past 40 years. The is­land is ex­pected to be­come one of the most im­por­tant gate­ways to the Pa­cific and In­dian oceans, ac­cord­ing to the gov­ern­ment.

The strat­egy is backed by geo-eco­nomics. Lo­cated in the south­ern­most part of China, Hainan is the coun­try’s bridge­head fac­ing the South Pa­cific and a key point on the 21st Cen­tury Mar­itime Silk Road, which con­nects South­east Asia and South Asia from China to the In­dian Ocean via the South China Sea and Malacca Strait. The Hainan FTZ can com­pre­hen­sively strengthen eco­nomic ties be­tween the five ASEAN coun­tries (Philip­pines, Malaysia, In­done­sia, Brunei and Viet­nam), and im­prove co­op­er­a­tion in trade, fi­nance, tal­ent, tech­nol­ogy and cul­ture.

Un­der the above strate­gic re­quire­ments, 35,400 square kilo­me­ters of Hainan Is­land will be a free trade zone, 25 times the area of the ex­ist­ing 11 FTZ in China.

There are three rea­sons to choose Hainan as the FTZ. First, the Qiongzhou Strait nat­u­rally sep­a­rates Hainan from the in­land re­gion. There is zero cost in phys­i­cal iso­la­tion for off­shore trade and off­shore fi­nan­cial busi­ness, just as most in­ter­na­tional off­shore fi­nan­cial cen­ters are lo­cated on is­lands. Se­cond, Hainan has 78 nat­u­ral har­bors, most of which can be built into port cities, pro­vid­ing ex­tremely fa­vor­able con­di­tions for eco­nomic open­ing-up. Third, the whole is­land can be de­vel­oped uni­formly with­out worries about un­fair com­pe­ti­tion, the siphon ef­fect or the spillover ef­fect brought by in­sti­tu­tional in­no­va­tion.

A Hainan FTZ will draw on the ex­pe­ri­ence of Sin­ga­pore and Hong Kong. In the early stages of de­vel­op­ment, it will be­come an in­ter­na­tional trade gate­way con­nect­ing coun­tries in South­east Asia by build­ing an in­ter­na­tional ship­ping hub with strong ra­di­at­ing ca­pac­ity, so as to pro­mote the com­ple­tion of in­fra­struc­ture, trans­porta­tion, fi­nance, com­mu­ni­ca­tions, tourism and other sup­port­ing sys­tems of the is­land. Ac­cord­ing to an in­dus­trial eco­nomic model es­ti­mate, its lever­aged eco­nomic ben­e­fit can reach 1.6 times, which will greatly in­crease GDP growth, per capita GDP and the ur­ban­iza­tion rate of the prov­ince. In 2017, all the above in­di­ca­tors for Hainan prov­ince were out­side the top 20 in China.

Af­ter­ward, we need to fo­cus on three as­pects to re­al­ize strate­gic re­quire­ments as fol­lows:

The 200-year his­tory of more than 600 free trade ports in the world shows that most de­vel­op­ment paths start from transit trade. How­ever, it is im­pos­si­ble for that to be the key to off­shore trade in the Hainan FTZ. Why is that?

From the in­ter­na­tional point of view, coun­tries choose a third coun­try to con­duct transit trade be­cause they can avoid the re­stric­tions of var­i­ous trade bar­ri­ers with its help, such as anti-dump­ing and coun­ter­vail­ing. But with the trade war be­tween China and United States, the trade bar­ri­ers against China may only in­crease rather than de­crease.

From a do­mes­tic per­spec­tive, as China’s de­mo­graphic div­i­dend dis­ap­pears grad­u­ally, pro­cess­ing trade can no longer meet the re­quire­ments of in­dus­trial up­grad­ing and trans­for­ma­tion. Only in­ter­na­tional ser­vice trade such as med­i­cal treat­ment, tourism, cul­ture and sports can fully re­lease the po­ten­tial of the is­land’s econ­omy to build an eco­nomic sys­tem of green and low-car­bon cir­cu­lar de­vel­op­ment.

Af­ter 30 years of de­vel­op­ment, Hainan has a rel­a­tively high level of in­ter­na­tional trade in ser­vices. The first en­try visa pol­icy was im­ple­mented in 2000. The third, fourth and fifth in­ter­na­tional air routes were opened in 2003. The con­struc­tion of in­ter­na­tional tourism in­fra­struc­ture on the is­land be­gan in 2009. An off­shore shop­ping tax ex­emp­tion pol­icy was im­ple­mented in 2011. The In­ter­na­tional Med­i­cal Tourism Pi­lot Zone was es­tab­lished in 2013.

In 2017, Hainan’s ser­vice sec­tor ac­counted for 55.7 per­cent of GDP, 4.1 per­cent­age points higher than the na­tional av­er­age, and con­trib­uted more than 70 per­cent to its eco­nomic growth.

With the de­vel­op­ment of off­shore trade, the off­shore fi­nan­cial busi­ness is bound to be highly de­vel­oped as well. Like Sin­ga­pore and Hong Kong, which grew into ma­ture in­ter­na­tional fi­nan­cial cen­ters grad­u­ally, the Hainan FTZ will be­come a large off­shore fi­nan­cial cen­ter. This is an im­por­tant move for China to pro­mote the open­ing-up of the fi­nan­cial in­dus­try from a new his­tor­i­cal start­ing point. Build­ing the largest off­shore ren­minbi mar­ket and pro­mot­ing in­ter­na­tion­al­iza­tion of the RMB is China’s ul­ti­mate goal.

How should the Hainan FTZ pro­ceed? On one hand, the Peo­ple’s Bank of China will fur­ther ex­pand the cross-bor­der use of RMB and ex­plore cap­i­tal ac­count con­vert­ibil­ity. Cross-bor­der trade set­tle­ment has been the main chan­nel for ex­port­ing RMB from on­shore mar­ket to off­shore mar­ket.

When the global amount of off­shore RMB de­posits reached an all-time high of 1.6 tril­lion yuan ($230 bil­lion; 202 bil­lion eu­ros; £179 bil­lion) at the end of 2014, 90 per­cent of them were ob­tained through cross-bor­der trade set­tle­ment. How­ever, the global off­shore RMB cap­i­tal pool has shrunk dra­mat­i­cally in the past three years, and off­shore RMB de­posits in Asia to­taled only 1 tril­lion yuan in 2017.

Through the fi­nan­cial in­no­va­tions of the Hainan FTZ, China ex­ports RMB to ASEAN coun­tries fac­ing the Pa­cific and In­dian Oceans, and opens the back­flow chan­nel, which is con­ducive to pro­mot­ing the ex­ten­sive use of RMB in Asia, so that the pro­por­tion of RMB in in­ter­na­tional pay­ments will be in line with China’s proper po­si­tion in in­ter­na­tional trade.

In 2017, China’s im­ports and ex­ports ac­counted for about 12 per­cent of the world’s to­tal in­ter­na­tional trade, while the amount of pay­ments in RMB was less than 2 per­cent glob­ally, and the set­tle­ment in RMB ac­counted for just 15 per­cent of China’s to­tal ex­ports and im­ports.

On the other hand, the China Se­cu­ri­ties and Fu­tures Com­mis­sion would su­per­vise the in­ter­na­tional com­mod­ity ex­change on the ba­sis of re­gional off­shore trad­ing cen­ters for com­modi­ties such as rub­ber in the Hainan FTZ.

Nowa­days, most of the world’s com­modi­ties trade is de­nom­i­nated in US dol­lars. Shift­ing even a frac­tion of China’s com­mod­ity trade to RMB would greatly in­crease the flow of RMB-de­nom­i­nated trade. The trad­ing of de­riv­a­tives, in­clud­ing com­modi­ties fu­tures and op­tions de­nom­i­nated in RMB, could not only help Chi­nese im­port and ex­port en­ter­prises hedge the risks of com­mod­ity price fluc­tu­a­tions and ex­change rate fluc­tu­a­tions ef­fec­tively but also help to in­crease the de­mand for RMB in global fi­nan­cial mar­kets and pro­vide new chan­nels for RMB back into China.

Es­tab­lish­ment of an in­tel­lec­tual prop­erty trad­ing cen­ter in the Hainan FTZ would be con­ducive to pro­mot­ing Chi­nese en­ter­prises’ in­no­va­tion and in­dus­trial up­grad­ing. Sci­en­tific and tech­no­log­i­cal ad­vance­ment is the de­ci­sive fac­tor of the com­pe­ti­tion among coun­tries in the fu­ture. There­fore, the cur­rent tar­iff sanc­tions on China’s ex­ports to the United States in­volve a large num­ber of high-tech prod­ucts, and the door for China to in­vest in US high-tech in­dus­tries is closed by strict for­eign in­vest­ment re­views.

It’s not just an iso­lated in­ci­dent be­tween China and the US, but also be­tween China and other economies, such as the Euro­pean Union and Ja­pan. It re­flects the on­go­ing bat­tle over in­tel­lec­tual prop­erty rights be­tween de­vel­oped coun­tries and China. How to deal with it? In the long run, China has to in­te­grate do­mes­tic in­dus­trial poli­cies, in­tel­lec­tual prop­erty sys­tems and in­ter­na­tional trade rules to en­cour­age in­no­va­tion and en­sure sus­tain­able and fair ac­cess for com­pa­nies.


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