Is Hainan the next Hong Kong?
There is no doubt about the prosperity of Hong Kong over the past 40 years, as major international businesses have leveraged Hong Kong as a steppingstone to do business in Mainland China. Hong Kong has historically provided a lot of benefits for businesses such as looser trade restrictions. It has also been a popular destination for Mainland shoppers, especially luxury shoppers, as most goods in Hong Kong are tax free.
But things are rapidly changing, and the Chinese tropical island of Hainan is now being referred to by many as “the next Hong Kong”. But what exactly does this mean and why is it happening?
Let’s take a look:
Isn’t Hainan “China’s Hawaii”?
Hainan has often been referred to as China’s Hawaii. A large tropical island with beautiful beaches, it’s not hard to see why. While it has always been a top domestic travel destination, in 2020 Hainan tourism took off.
Domestic tourism in China flourished in 2020 as China quickly brought the COVID-19 pandemic under control. Citizens weren’t able to travel abroad, so they started to explore what China had to offer.
As China’s only domestic tropical island destination, travelers who would have usually opted for international beach destinations such as Thailand or the Maldives rushed to Hainan.
So, if Hainan is “China’s Hawaii”, why is it now also “the new Hong Kong”?
Free trade, tax free zones, and business incentives!
The Master Plan for Hainan
On June 1, 2020, the Central Committee of the Communist Party of China and the State Council of the People’s Republic of China issued the “Overall Plan for the Construction of Hainan Free Trade Port“, proposing the principle of zero tariff and low tax rate, and increasing the tax-free shopping quota for Chinese citizens to 100,000 RMB per person per year (up from the previous 30,000 RMB), while expanding the types of duty-free goods.
China wants to make Hainan a shopping paradise for Chinese consumers, and its working. Social media platform Xiaohongshu has numerous posts of consumers sharing their “shopping guides” for the best deals in Hainan. I asked Kejie, my fellow content creator here at China Marketing Insights, if she had ever been to Hainan and she immediately responded, “No but I really want to go. Its a shopping Heaven.”
The plan also includes plenty of incentives for businesses and workers. Not only can consumers purchase products duty free, but businesses can also import products and raw materials tax free. The goal is to incentivize cross-border trade, not only to increase import and export capabilities, but also to boost trade on foreign and domestic investments, data, capital, and talents.
And by 2025 China wants to reduce the corporate tax rate by 15% for enterprises that are registered in Hainan. And employees of these companies residing in Hainan will also have an income tax cap of 15%, much lower than many other provinces, especially the more you earn.
The government will also allow foreign personnel to act as legal representatives of statutory institutions, public institutions, and state-owned enterprises and ease restrictions on work permits for foreign personnel.
People who live on the island also get to enjoy the duty free and tax-free benefits as long as the things they buy don’t leave the island, which may motivate more people to move there and enjoy a higher quality of living for less. A great example of this are cars. An imported car in China is subject to taxes and tariffs that can easily add up to 40% or more of the car’s value. So for example, purchasing a $40,000 vehicle in other parts of China would be $65,000, but in Hainan should still be $40,000.
Isn’t one Hong Kong enough? Why build another one?
There are many reasons, but the simple answer is more ports and free trade zones equals more growth. If you look on the map, Hong Kong is a lot smaller then Hainan, and at this point a lot more expensive. So, for businesses, there is not a lot of room for growth in comparison to the largely untapped Hainan.
Number two…. Well I am not going to dig into the political issues here, you can do a simple Google search if you don’t know what I’m talking about, but politics are also a major factor. In 2019, tourism to Hong Kong saw a dramatic drop due to anti-government protests.
Hainan, on the other hand, has always been completely part of China, there is no debate about that, and it is fully aligned with Chinese government, so building duty free shops and tax-free trade zones on Hainan carries much less risks and push-backs.
Third, Hainan has become one of China’s most popular domestic travel destinations, adding in duty free shopping zones and dramatically increasing duty free shopping limits will ensure that travel to Hainan continues to prosper even after the COVID pandemic has passed and international travel has reopened.
What does it mean for brands?
With China boosting domestic travel to ease the economic impact from the pandemic, more Chinese consumers are choosing to travel within the country, domestic flights have picked up from a low of 5,824 flights to 7,003 daily flights (up 20%) on average per week.
Many international hotel chains have resorts in Hainan and more are sure to come.
Pre pandemic we have already seen a steady increase in the housing market in Hainan, more people are moving to Hainan to retire because of the Sandy beaches and good air quality. For brands that want to thrive in China, Hainan might be a good starting point.
Conclusion
I do not think of Hainan as a replacement for Hong Kong. Hong Kong has been a long established economic, finance, and trading hub of the East, and that did not happen overnight. However, Hainan is more moldable in comparison, and there is more room for growth, any mistakes that Hong Kong made in the past, Hainan can learn from and avoid it, so that the speed of development for Hainan will be dramatically shortened compared to Hong Kong.
