Preliminary Thoughts on Building Hainan Free Trade Port (60 recommendations)

  Time:2019-04-18   Hits:0

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China Institute for Reform and Development

December 2018


At present, China is in a new phase of opening up against the background of rising new situations of economic globalization. After president Xi Jinping gave his speech on 13 April 2018, it is an urgent task for Hainan to formulate a master plan to build Hainan into a Free Trade Port (FTP). As such, China Institute for Reform and Development (CIRD) conducted research and investigations, and has finished a report entitled Preliminary Thoughts on Building Hainan Free Trade Port (60 recommendations).

I. General line of thought

Hainan FTP with Chinese characteristics must be built with stronger and better leadership of the Communist Party of China. Within the framework of socialist system, Hainan FTP shall serve the country's major strategies; prioritize opening up and institutional innovation; develop service trade as the leading sector in its economy; take urban-rural integration, land–sea connection and green development as the main features; and build a most open, internationally competitive platform with its own unique characteristics through comprehensive deepening reform and opening up, and provide a model for exploring and building a community with a shared future for humanity.

1.Strategic objectives

1) Build Hainan into a platform with the highest level of opening up. Hainan must build a free trade port that is "highly liberalized, highly convenient and highly legalized", which means free flow of essential factors such as services, commodities, capital, people and information, realizing "zero tariff, zero barriers, zero subsidies"; an open platform that facilitates trade in services, trade in goods, and investment and financing. A Basic Law of Hainan Free Trade Port with Chinese Characteristics and other needed laws and regulations shall be in place in a timely manner.

2) Build Hainan into an important hub open to Pacific Ocean and Indian Ocean. Giving full play to its geographical advantages, Hainan should lead to build a "Pan-South China Sea economic cooperation circle". With Hainan FTP as a platform, with service trade and maritime industries as the overarching themes, with establishing free trade network as priority and based on the interconnection of maritime infrastructure, efforts should be made to build Hainan into an economic cooperation platform, an important hub of interconnected infrastructure, a base that develops comprehensive approaches to and provides services and support to maritime economy, a regional platform for cultural and people-to-people exchanges, and a model base for coordinated military and civilian development, so as to better serve China’s national marine development strategy and "Belt and Road Initiative".

3) Build Hainan into an international service trade center. Led by tourism, modern service industry and the high-tech industry, Hainan FTP should be built at a faster pace into a world-known international center for tourism and consumption, modern service industry, high-tech R&D and innovation talents, and a centre for the transit, transaction and promotion of global service trade, that is how Hainan going to play an outstanding role in China’s opening up and global economy and trade.

2. Major tasks

4) Create an internationally competitive business environment. Hainan FTP should create a business and investment environment of highest level by taking the high standards of international free trade agreements and investment agreements as benchmark to drive its service-focused market open wider to the world; create a most favorable tax environment with tax policies as friendly as that of Hong Kong, Singapore and other world-renowned free trade ports; create a highly-appealing environment for talents by taking the lead in pilot reform on the management of international talents and by overhauling existing system and mechanism that introduce and employ talents.

5) Develop a "Pan-South China Sea Economic Cooperation Circle". Hainan should take cruise tourism as the breakthrough point to build the Circle. By taking tourism, marine industry and related service industry as forefronts, Hainan should also speed up bilateral and multilateral free trade in the Pan-South China Sea region. Yangpu, a northwestern costal city in Hainan, should be turned into a free industrial port with main businesses like exploring, processing, storage and trading of oil & gas resources in the South China Sea. Sansha, its most southern city, should be a frontier base of marine customs special control area. And Boao Forum for Asia should be given full play to deepening cultural and people-to-people exchanges in the Pan South China Sea region.

6) Make service-trade-led economy as Hainan FTP’s outstanding feature. Hainan should take the first step in opening up modern services by making full use of markets and resources home and abroad, and draw up and implement a minimized negative list of service trade in line with the standards of international high-level services and management. By attracting high-quality international capital as well, Hainan should form a new system of service trade with Hainan characteristics embraced by international standards.

3. General pre-conditions

7) Build up a modern infrastructure system. Hainan should speed up the construction of, among other things, international ports, shipping facilities, shipping routes, information and communications infrastructure, environment protection installations under the guidelines of developing in advance appropriately, expanding connectivity, ensuring safety, increasing efficiency and promoting intelligent and green development. As required by what is needed to build a world-known international tourism and consumption center, Hainan should strengthen the construction of software and hardware environment for tourism and related services with international standards. The construction of marine infrastructure like submarine optical cable, new energy utilization apparatus should also be accelerated to build a smart ocean, smart islands and reefs.

8) Create a pattern that market allocates resources. Following the principles of "competitive neutrality" and "ownership neutrality", Hainan should formulate unified rules and regulations to ensure fair competition for enterprises, abolish regulations and practices that hinder the unification of the market and fair competition so as to ensure the equal status of the market players. At the same time, the government should play a better role in public services, market supervision and social governance.

9) Develop a new approach of green development. Hainan should be built into a "non-toxic agricultural island" and a "new energy vehicle island" and should contribute to build a "blue ocean" by more judicial protection on the marine ecological environment, and pilot projects on carbon sequestration in marine ecosystems.

10) Establish a highly efficient administrative system. To see "small government, large market and big society", Hainan should reduce the institutional transaction costs for enterprises, make statutory bodies take as much responsibilities as possible in services and supervision, and strictly protect, especially by law, the "sacred inviolability" of the property rights of all entrepreneurs.

11) Establish an effective regulatory system for a highly liberalized economy. Complete laws and regulations should be made and strictly enforced to form the economic governance model of "easy access, post-mortem supervision and the strictest rule of law".

II. Policy needs

Characterized by service trade, Hainan FTP should implement the most open policies on market access and the most trade-friendly policies in the world, and these policies should be written in law in a timely manner.

1. Policy needs for a fully opened service market

12) Realize policy development for market opening in prioritized service sectors. Some open policies that are currently enjoyed only in Hainan Boao Lecheng International Medical Tourism Pilot Zone should be extended to implemented in the whole island. At the same time, more open industrial policies on medical care and health shall be practiced in the Pilot Zone; approval procedures should be streamlined in MICE Industry; restrictions should be further lifted on the share of foreign equities and the business scope in cultural, sports and entertainment industries; and efforts shall be made for a greater liberalized market in these industries.

13) Realize breakthroughs in market opening of specific service sectors. The access to telecommunications market should be eased to achieve full competition; and the access to internet abroad should be relaxed when conditions allow. Hainan should promote the opening of the education market, especially in vocational education, and abolish the restrictions on foreign equity in non-compulsory education. Foreign investment should be allowed to establish accounting, legal, arbitration services and other business services in various forms to enhance Hainan’s international competitiveness in this respect.

14) Promote policy innovations in opening financial market. Hainan should completely eliminate the differences between foreign and domestic financial institutions in qualifications and business scope and to form a financial structure mainly by foreign and social capital. The full convertibility of RMB capital account should be realized by stages. On the premise of the general separation of offshore business from onshore business, Hainan should encourage and support domestic and foreign financial institutions to carry out offshore business in Hainan. And the exploration and issue of legal digital currency should be supported.

2. Fiscal and taxation policy needs for a fully opened service market

15) Implement zero-tariff policies. Hainan should take the lead in expanding the policy of zero tariff on anti-cancer drugs which have not been registered in China, but have been listed in foreign countries, and on medical devices related to cancer treatment. Hainan should impose zero tariff on production factors under service trade category as long as they are subject to full rigor of supervision, and gradually on other imported products excluding some specific ones.

16) Implement low tax rate policies in modern service industries in a speedy manner. The enterprise income tax rate of modern service industry should be set at 15%. And zero value-added tax rate should be applied to the transactions between enterprises. And enterprises, when import foreign equipment and commodities for their own use, should be exempted from import value-added tax. For enterprises investing in Hainan enterprises or purchasing Hainan enterprise bonds, their income tax payable should be deducted during a certain accounting period.

17) Lower individual income tax rates. Hainan should set the tax rate of personal income between 0-20%. Personal income tax should be exempted or halved for accredited top talents within a certain period of time. High-caliber and much-needed talents shall be entitled to pay income tax in installments for a period of five years.

18) Implement favorable fiscal and taxation policies for high-tech enterprises. High-tech enterprises registered in Hainan FTP should enjoy the preferential treatment of "five exemptions and two halves"--that means tax exemption for the first five years and halved tax for the next two. The proportion of R&D expenses covered by the additional tax reduction policy should be raised to 200-400%, and certain amount of subsidies on R&D should be offered every year.

3. Policy needs for the liberalization and facilitation of service trade

19) Liberalize investment in service trade. The prohibitions and restrictions in the existing negative lists of investment access and of cross-border service trade should be completely removed by 2025. While fields like publishing, finance, telecommunications, law should be managed by licensing system, other fields should be gradually liberalized. Foreign investors should be ensured to enjoy the same treatment as domestic investors, in business scope, for example.

20) Reduce domestic barriers to service trade by referring to international standards. Hainan should take the lead in introducing medical drug management standards in Europe, the United States and Japan, and be able to automatically obtain certification and market access for drugs and medical devices that have been assessed by standards in Japan, the United States and the European Union. Embracing international management system standard in service, Hainan should allow foreign service enterprises which meet the their local standards and persons who are with relevant professional qualifications to do business directly after filing and auditing.

21) Implement policies that liberalize and facilitate the import and export of goods in the category of service trade. Commodities and instruments that are for personal use purpose only in service trade category shall be exempted from inspection and examination; Hainan should establish "Authorized Economic Operator" certification standards for service trade, and to give qualified domestic and foreign service trade enterprises preferential treatments, including reduction of or priority for customs inspection.

22) Implement policies of free movement of people. Hainan should gradually expand the scope of visa-free travel, lower the threshold for "green card" application, expand the application scope for permanent residence in Hainan by formulating criteria in classifications such as technology, investment and family reunion. Hainan can pilot the "dual nationality" system. Hainan Immigration Administration should be established to manage and coordinate foreigner-related matters like visa, residence, employment. Under record-keeping system, foreigners with employment visa will not have to obtain employment permit to work in Hainan.

III. Institutional innovations

To guarantee a smooth and fast building of Hainan FTP, Hainan will remain committed to institutional innovation and break down all institutional obstacles to development.

1. Establish a special regulatory area for state customs

23) Build up institutions of special customs regulation for Hainan FTP. In state customs special supervision area, Hainan should explore the mode of "line management and classified supervision" for the liberalization and facilitation in investment and trade. Although this special supervision area is not exactly a separate customs territory, it also performs the functions of customs supervision entrusted by the state to "separate customs territories" like Hong Kong and Macao. Thus, the opening policy of Hainan FTP can be fully implemented and all kinds of risks can be prevented effectively.

24) Formulate Hainan FTP Special Customs Regulations at the national level. The Regulations should make clear the legal status, nature, functions, management system and operation mode of Hainan special customs supervision area, which will be directly under the vertical management of the General Administration of Customs.

25) Implement a new system of special customs regulation. Transit goods that do not enter Hainan market should be subject to "no declaration, no taxation, no statistics and no inspection". For most of the goods entering and leaving the island, Hainan should employ a management mode of “self report by enterprises, putting on record within a defined time period, and sampling inspection”. A few prohibited and restricted goods should be subject to an import and export control system. The electronic seine network should to set up on the whole island for an integrated and intelligent island covered by information management and control system.

2. Implement a fiscal and taxation system for Hainan FTP

26) Streamline tax sharing between the central and local governments. Taxes such as consumption tax, customs duty, import link value-added tax, which are now the central government’s tax revenue, and taxes like resources tax, which are now shared by central and local governments, should be given to Hainan local tax revenue. Rights of local tax type, tax reduction and exemption, tax rate adjustment should be devolved to Hainan local government to support the building of Hainan FTP.

27) Introduce a simplified taxation system with direct tax as the mainstay. Hainan FTP should cancel or exempt value-added tax, urban maintenance & construction tax, tax on land occupation, vehicle and vessel use tax, increment tax on land value and so on; merge building tax and urban land use tax into real estate tax; combine contract tax to stamp tax; conclude tobacco tax into consumption tax. Hereby Hainan will form a simple tax system by tax cancellation, exemption, merger and so on.

28) Adjust the rates of some taxation items. While lowering rates on enterprise and personal income tax, Hainan should raise rates on real estate tax, environmental tax and resource tax to reflect the real value of land, environment and resources. Real estate market should be regulated through tax means, for example, raising stamp tax rate on real estate transactions.

29) Introduce an innovated tax collection system. The leadership and management system of tax departments should be reformed, and Hainan Provincial Tax Service of the State Taxation Administration should be brought into Hainan local administration under the name of Hainan Taxation Bureau. Hainan should rework the tax supervision system, and speed up the establishment of the “internet + taxation” information system supported by the electronic taxation bureau and big data platform. Hainan should strengthen the tax supervision of offshore business by closer international cooperation to prevent it from becoming a "tax evasion port".

3. Implement a financial system for Hainan FTP

30) Build up an off-shore financial system compared to the onshore in the mainland. Hainan should adopt an offshore financial system that separates itself from the onshore financial system by formulating "Regulations on Hainan FTP Offshore Financial Administration", and should set up a RMB-denominated account system with integration of domestic and foreign currencies and with full convertibility, also a system that bases on the FTP offshore financial rules.

31) Build up an independent and highly efficient financial regulation system. A special agency under the Financial Stability and Development Committee should be set up to supervise Hainan FTP’s financial industry. Hainan Financial Supervision Bureau should be established to adopt cross-sector financial supervision regime .

32) Introduced an innovated approach of financial regulation. An information monitoring and management system supervising capital flow should be established to realize a complete financial information monitoring across departments, industries and markets, and to improve the Hainan FTP’s ability to identify financial risks and to prevent systemic risks.

4. Promote adjustment of administrative regions

33) Form a structure composed of five major regional cities directly under the administration of the provincial government. With the idea of “one island city”, Hainan should turn its existing administrative division system of 18 cities and counties (except Sansha City) into one that only has five regional central cities (in the east, west, south, north and middle of the island).

34) Promote urban-rural integration in a speedy manner. Hainan should cancel dual urban-rural household registration system, and establish a unified resident permit system. And the integration of basic public services in urban and rural areas should be accelerated by various means including utilizing most of the incremental benefit released from land and other resources. Hainan should establish a unified land market for urban and rural areas, while giving farmers complete property rights to contracted land and homestead.

5. Establish a highly efficient and streamlined administrative system

35) Plan A: Improve administrative efficiency by greatly streamline the current administrative structure. Guided by the idea of "small government" and the principle of “decentralization, unification and integration”, Hainan should make an overall plan about provincial party and government organizations by departmental restructuring and streamlining organizations and personnel.

36) Plan B: Implement a dual development administration system. Establish a Hainan FTP Development and Management Committee, taking the responsibilities of designing strategies and policies for provincial economic development, planning industrial development, and managing key development zones.

6. Promote the reform on judicial system

37) Promote the reform of criminal litigation system. Responsibilities of trail and execution shall be separated, and the court independently exercises its judicial power;  court hearing should be the center in the course of a trial. An independent body should be set up to perform the judicial execution. Set up specialized courts such as "e-court" (court supported by digital technology) and "intellectual property court".

38) Introduce diversified dispute settlement mechanisms. Hainan should establish an alternative dispute resolution mechanism based on mediation, arbitration; improve diversified dispute resolution mechanism for international commercial business, encourage and support concerning parties to resolve disputes by mediation, arbitration and other non-litigation means according to their will. A diversified docking platform should be set up to reduce the cost of dispute resolution.

39) Introduce internationally practiced arbitration. Hainan should welcome international commercial arbitration institutions in the forms of sole proprietorship, joint venture and cooperation, and introduce advanced arbitration concepts and models. The establishment of arbitration models of two legal systems should be supported to adjudicate civil and commercial cases. Hainan should formulate illustrative clauses for ad hoc arbitration and establish the system of selecting and appointing temporary arbitrators. And international professional alternative dispute settlement institutions should be introduced.

40) Develop a legal service market with diversified providers. Hainan should allow foreign law firms set up branches, and should build international law schools and cooperate actively with domestic and foreign legal services.

7. Sufficient authorization from the central government

41) Legislation by the National People's Congress (NPC). Plan A: NPC promulgates the Basic Law of Free Trade Port with Chinese Characteristics to define the legal nature, legal status, strategic objectives and special functions of free trade ports with Chinese characteristics; Plan B: the NPC approves the implementation of the Basic Regulations of Hainan FTP.

42) Introduce a two-tier central-local administration approach. Central Committee of Hainan FTP to be set up at the central government level; and a Free Trade Port Management Committee to be set up at the provincial level.

IV. Action suggestions for the move from a free trade pilot area (FTPA) to a free trade port

With building a free trade port with Chinese characteristics as the final goal, Hainan should at first have to be committed to building a high-standard and high-quality free trade area, and then speed up the transition from FTA to FTP step by step.

1. A action plan to realize the move from a FTPA to a FTP in the next few years is to be promulgated in a speedy manner

43) Introduce General Plan for Hainan FTP. It is suggested to officially release the Plan on the first anniversary of General Secretary Xi Jinping's speech on April 13th, 2018, which will help stabilize expectations and gain collective efforts.

44) Make it clear that we are to build the whole island into a FTP, not in a designated area only." Hainan should try to carry out island-wide any task, policy and institutional innovation that is applicable to the whole island.

2. Achieve major breakthroughs in improving business environment

45) Address and solve highly-concerned issues with market-oriented approaches. Based on increasing the total amount of land supply and optimizing the structure of land supply, Hainan should establish a new housing system featuring multi-subject supply, multi-channel guarantee and rent-and-buy approach to meet the housing demand of low and middle income groups. By adjusting the vehicle purchase tax and other economic means, Hainan should guide and promote upgrading the structure of passenger car across the island.

46) Give greater autonomy to market players to effectively develop market dynamics. Hainan should fully implement self-registration and simple cancellation system and promote corporate commitment system. Enterprises will not have to put on record their general investment projects, and Hainan should allow and guarantee enterprises greater independence in making investment decisions. Any government practice that distort competition should be eliminated.

47) Speed up the construction of market infrastructure such as trading agencies. With advantages it enjoys in sectors like tourism, health-favored natural conditions, tropical agricultural products, commodities, shipping, Hainan should speed up the establishment of international modern trading sites.

3. Implement free trade policies in the service category in a speedy manner

48) Promulgate and implement a minimized negative list for service trade ASAP. Hainan should make a comprehensive and minimized negative list of service trade including investment access and cross-border services, and it should also be a unified negative list for both foreign and domestic capital.

49) Favorable policies in Boao Lecheng International Medical Tourism Pilot Zone shall be extended to the whole province ASAP. The medical and health enterprises registered in the Pilot Zone should be allowed to set up branches in other parts of the island with the same preferential treatment. Medical devices whose kinds have not been registered domestically can be used outside Boao Super hospital to the whole island.

50) Build up a globally recognized international tourism consumption center by collaborating with Hong Kong. Hainan should introduce all Hong Kong’s industrial chain, supply chain in tourism consumption to improve the international level of Hainan duty-free shopping service.

4.  Achieve remarkable results in efficiently utilizing resources.

51) Priority shall be given to improve the utilization of land resources. As for land use, Hainan government should strengthen its overall utilization, unified acquisition and reserve, unified development and management, and unified public supply, and as for shoreline resources, the government should have a unified planning. Hainan government should also tighten up the approval for land use, limit the minimum land price, and raise the average land price.

52) Efforts shall be made to improve the utilization of marine resources. Cruise tourism should be a breakthrough point in co-establishing the "Pan South China Sea Tourism Economic Cooperation Circle", and the central government should support Hainan to develop fishery industry in Xisha, Nansha and Zhongsha and to participate in oil & gas exploration in South China Sea, and devolve partial rights on the exploration and management of oil & gas in South China Sea to Hainan local government. Hainan should work hard on building an international shipping hub with strong service ability that reaches far, and on developing marine science and technology to increase its competitiveness in this regard.

53) Deepen the reform of “unifying multiple rules” by promoting the "six unifications". Based on overall planning of the province, Hainan should accelerate the unification of land use, infrastructure, industrial layout, urban and rural development, environmental protection, and social policies, thus significantly improve the efficiency of resources utilization throughout the province, so as to win an overall advantage for Hainan’s development.

5. More financial support for the initial stage of Hainan FTP

54) More support shall be given to Hainan's public fiscal capacity. When Hainan building free trade area, the central government should increase the general and special transfer payment to Hainan; and concluding “free trade port” factor into current transfer payment coefficient, the central government should also raise the proportion of basic operating expenditure to standard income.

55) More fiscal and taxation support to the infrastructure in Hainan. The central government is suggested to set up a special transfer payment item to further improve Hainan FTP’s highways, international ports, international routes, information and tourism infrastructures, and so on.

56) Allow Hainan to issue RMB bonds in international capital market. The central government is suggested to issue long-term bonds of Hainan FTP, and support Hainan issuing long-term bonds denominated in RMB in international markets with state credit as guarantee. International capital should be utilized to improve Hainan’s software and hardware environment. Hainan should carry out pilot program of issuing bonds of Hainan FTP in Hong Kong.

6.  Develop Hainan’s unique advantages in attracting talents in a speedy manner

57) Attract international talents with a statutory body as the main platform. Regulations on the Promotion of talents in Hainan FTP should be formulated as soon as possible, and the statutory bodies should be given legal autonomy to attract all kinds of high-end talents.

58) Establish efficient and flexible employment mechanisms ASAP. Hainan should introduce programs that best encourage and support various startups, and encourage universities, research institutes and enterprises to stimulate innovation through equity, options, dividends and other ways.

59) Introduce a flexible talents support system. Except party and government organs, the system of permanent staffing should be abolished in state-owned enterprises, government affiliated institutions, social organizations and so on. Government affiliated institutions should adopt budget management, and devolve the power of personnel management, and when conditions allow, should be turned into statutory bodies and adopt employment system. Hainan should build a civil servant team made up mainly by those who engage in professional technology and law enforcement, reducing the administrative proportion to the lowest. The existing administrative title level-based system should be changed into a position-based system.

60)  Introduce and develop a service system for international talents. Hainan should build international talent communities in designated areas for foreign entrepreneurs, senior management personnel, experts and scholars; support the establishment of service for foreigners’ permanent residence; introduce foreign workers like Filipino domestic helpers so long as relevant systems can be established, risks can be managed and service can be improved.


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