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Economy

China's Hainan to be tariff-free to rival Hong Kong

Southern province aims to become world-class trading hub by 2050

BEIJING -- China has designated the southern island province of Hainan as a free trade port and will offer tax and trade incentives to draw businesses and tourists, with an apparent goal of providing a mainland alternative to Hong Kong.

The plan is to open up Hainan in stages, with interim milestones in 2025 and 2035 before fully transforming into a world-class port city by midcentury.

"We will try to make each day really count to ensure that all policies are put in place," said Liu Cigui, Hainan's Communist Party secretary, in a joint news conference earlier this month.

Production equipment, vehicles, yachts and Hainan residents' purchases of consumer goods are immediately exempt from customs duties as part of the Hainan Free Trade Port initiative. Imports will be exempted from consumption and value-added taxes.

So "if you buy a 10 million yuan [$1.4 million] imported yacht in Hainan, you don't need to pay the 3.8 million yuan in taxes," Hainan Gov. Shen Xiaoming told the news conference.

A factory on the island will play no tax on imported raw materials or on finished products exported to the mainland. In the case of a meat producer, one head of cattle imported for processing would normally face a tariff as high as 70% when exporting to the mainland.

The number of duty-free products will be increased from 2025. Products still subject to tariffs will be put on a list, with everything else exempted.

Companies in industries subsidized by the government will see their 25% corporate tax rate lowered to 15%. By 2035, the 15% rate will apply to all sectors.

Highly skilled workers will have their income tax capped at 15%. Progressive rates of 3%, 10% and 15% will be put in place by 2035, streamlined from 3% to 45% across seven tax brackets.

People will be able to travel to Hainan for business without a visa, a privilege currently limited to pleasure trips.

Hainan will also open up certain service sectors to foreign investors. "We will establish a negative list for cross-border service trade," Vice Commerce Minister Wang Shouwen said at the news conference. "Entry of all service trades of these three forms outside the negative list will be allowed."

This initiative will facilitate trade, investment, cross-border funding, reciprocal transport, and the movement of people. "The real aim is to promote structural reforms on the mainland from Hainan," a source involved in drafting the plan said.

A more detailed plan is circulating among Communist Party officials at the cabinet level and higher, the source said.

"The goal is to have the business environment catch up to Shanghai in 2025 and to Hong Kong in 2035," a public-sector economist said. The duty-free trade, the low, graduated income taxes, and the looser restrictions resemble Hong Kong's.

Hainan and Hong Kong "are more complementary than competing," said Lin Nianxiu, deputy director of the National Development and Reform Commission, China's economic planning body, at the news conference. "Therefore, Hainan will not have a negative impact on Hong Kong."

Still, Hainan could substitute for some functions currently served by Hong Kong.

Although Hainan is a fully domestic province, it contains duty-free shops. The free trade port initiative will raise the individual limit on duty-free purchases to 100,000 yuan from 30,000 yuan. The list of applicable products will also be expanded.

"If you want to travel to Hainan, I advise you to take extra money and do a lot of shopping," Vice Finance Minister Zou Jiayi said at the news conference. Hong Kong could see a further decline in shoppers from the mainland.

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