Highlights

Situated on an island to the south of China’s mainland, Hainan Province is opening up to the rest of the world more than ever. The Overall Plan for the Construction of Hainan Free Trade stressed the introduction of a zero-tariff policy, facilitation of the free flow of production factors and the fact that Hainan will be on top of the high level of international economic and trade rules. As the biggest special economic zone in China thus far, Hainan Free Trade Port is likely to become the new face of opening-up. The plan integrates existing opening-up measures in China with Hainan’s own characteristics, and these are highlighted and featured below.

• To facilitate free trade and investment with highest standards around the globe.

As well as the zero-tariff policy, items that are not exempt from tariffs will be processed with more efficiency and reduced barriers to ease the coming and going of imported goods in Hainan. At the same time, the port will take advantage of negative lists on cross-border services so that foreign service providers are treated the same as their local counterparts. Ultimately, the port will aim to encourage free trade and cross-border services as far as the laws and regulations will allow. In terms of attracting foreign investments, market access will be loosened for foreign businesses and investments by simplifying approval procedures and decreasing operational costs.

• To apply globally-competitive taxation policies.

Establishing a high-quality taxation system that is compatible with the port will attract foreign trade and investment and, above all, is essential in order to enhance Hainan’s international competitiveness. On one hand, the zero-tariff policy and optimisation of corporate and individual income taxation will be gradually implemented, with the goal of creating a preferable business environment. On the other hand, in alignment with China’s taxation reform, it is necessary to explore simplifying the taxation system, strengthening tax collection and management, and reinforcing tax evasion detection to prevent Hainan from becoming a haven for tax evasion.

• To pave the way for cross-border capital flow.

Cross-border capital flow is an important indicator for international free trade ports, and a critical prerequisite for facilitating trade and investment. Based on existing local and foreign currency accounts and free trade accounts, a multifunctional free trade account system will serve as a platform for financial opening-up, which is essential for the development of trade and real economy. Related policies should consider how to better assist cross-border investment and financing. In addition, the opening-up of financial products should be paced to avoid causing instability in the domestic financial market.

• To implement transportation policy that is highly open and enabling.

A high-standard free trade port must be facilitated with transportation policies that are highly open and efficient. As Yangpu becomes a port of registry, it is an opportunity to further develop Yangpu Port and construct the new western land-sea corridor as an international shipping hub. Relaxed airspace and airway control, as well as traffic rights, are needed to stimulate domestic and foreign airlines’ operation into Hainan. Meanwhile, transportation and customs capacity and movement between Hainan and the rest of China should also be strengthened and improved through the use of digitalised and smart equipment.

• To underscore tourism, modern services and high-tech industries.

Taking into account its own features and the resources available, Hainan will include international capabilities, leading technology and innovative ideas that will aim to improve its industry competitiveness. An international tourism and shopping destination will be better able to integrate culture, sports, health care and eldercare in terms of development in the tourism sector. As for modern services, innovation factors will be collected and the role of international shipping hub will be consolidated to form a maritime service system with a global competitive advantage. As for high-tech industry, the emphasis ought to be on the Internet of Things, artificial intelligence, block chain, digital trade, deep sea and space industries, and advanced manufacturing.

• To prioritise the safe and sound flow of data in the overall institutional design.

Proposals to improve infrastructure, communications market access and cross-border data services are suggested in Hainan to encourage the collation and cross-border movement of data. Next, communication resources and businesses will be further opened-up to accelerate the development of a digital economy, while data flow and information security will both be safeguarded by institutional innovation.

• To improve regulation and government service to achieve sustainable development.

Comprehensive regulatory measures and service systems will ensure that preferential policies can be applied to companies that choose to settle in Hainan as well as protecting their interests and legal rights while facilitating trade and investment. In the meantime, the establishment of a legal system will create a sound environment, based on the law of Hainan Free Trade Port as well as local legislation and commercial dispute settlement mechanism.

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Highlights

Cao Yuanzheng, Chairman, BOCI Research Ltd.

Due to the economic shutdown around the world, global trade is shrinking rapidly and the industrial chain is in the risk of a short-term disruption. The longer the pandemic persists, the harder the global economy will be hit. Therefore, controlling the pandemic has become the top concern for economic policies which are aimed at sustaining the current growth rate.

China’s economic recovery faces many challenges ahead. First, under the dual impact of economic downturn and the pandemic, employment growth dropped by 6 percent compared with the last quarter, which indicates a gloomy prospect of the labor market. Second, household consumption is declining at a faster rate than the residential income growth, imposing pressure on domestic consumer market. Third, overseas demand has been shrinking and Chinese foreign trade companies have got stuck in the mire of “shortage of orders”.

The policy responses should be based on “bottom-line thinking”, in other words, ensuring people’s livelihood should replace economic growth stimulation as the primary goal. In the long run, the focus should be on domestic demand expansion, which needs to be fueled by reform. In the medium term, response-based contingency mechanisms should be established with more attention to food security. In the short term, China’s GDP growth must be kept at a certain rate, which is vital for employment, fiscal revenue and financial risk prevention.

Huang Yiping, Vice President, National School of Development, Peking University

Unconventional economic policy responses are needed in times of crisis. Governments and central banks should adopt stronger monetary and fiscal policy measures that go beyond conventions. In addition, when we design unconventional policy responses, exit mechanisms should be taken into account to the extent possible. At the same time, we should be fully prepared for the possibility that the global easing cannot exit in the long run.

For micro, small and medium-sized enterprises (MSMEs) and ordinary households affected by the pandemic, maintaining some liquidity and a relatively healthy balance sheet is very critical. The biggest risk at the moment is the possible cash flow break for MSMEs. Although the Chinese Government has introduced a number of measures to bail out businesses, more direct financial subsidies households and businesses are needed.

Once the pandemic is brought under control, more focus should be given to reconstruction and the monetary policy should be further eased. At the current stage, the pandemic is under initial control and a moderately easy monetary policy should be of relevance. The fiscal policy should play a bigger role in reconstruction. Many things can be done on the fiscal front, such as reducing taxes and fees, supporting investment, and increasing spending on people’s livelihood.

Zhang Xiaojing, Deputy Director, Institute of Economics, Chinese Academy of Social Sciences

The Chinese government may consider giving cash subsidies to low-income groups so as to directly stimulate consumption. Compared with consumption coupons, cash subsidies are more inclusive and non-discriminatory. As the low-income groups have a higher marginal propensity to consume, cash subsidies to low-income groups will not only help ease their survival pressure and boost domestic consumption, but also facilitate poverty alleviation, a crucial target set by the central government in this year.

Leverage is an important tool for government to pull the economy out of the woods. The leverage ratio in China’s public sector is much higher than that in private sector, which to some extent reduces the efficiency of leverage in resources allocation. But at the current stage of China’s development, there is a greater need to stimulate the vitality of the private sector. This requires more resources be allocated to the private sector through leveraging. The active participation of private capital will facilitate market-based risk-sharing and mitigate the risks imposed by the high leverage ratio in public sector.

Feng Qiaobin, Deputy Director, Macroeconomic Department, Development Research Center of the State Council

The policies are aimed at creating a “protective cushion” and “buffer zone” for the economy and society in order to prevent social unrest and the collapse of the economic system after the pandemic. How to deal with the huge debt left behind by stimulus policies and address the fragility of the economic system in the later stage remains an issue that governments need to address.

China’s fiscal policy in the next stage should focus on “reform bailout” rather than “stimulus bailout” only. Priority should be given to the following aspects in the process of policy implementation. We should strike a balance between meeting short-term needs and ensuring long-term development. At present, China has entered into the “mitigation stage” of the pandemic, so the policy is mainly aimed at medium-and-long-term recovery. Compared with the acquisition of assets in Europe and the United States through setting up SPVs, China also has the need to directly purchase corporate assets. However, with large SOEs as a stable anchor, China can focus more on some key industries and private enterprises. Even if fiscal policy can be implemented to increase the deficit and debt, fiscal funds should be increased for financing.

Guan Lixin, Deputy Director, Circulation and Consumption Research Institute, Chinese Academy of International Trade and Economic Cooperation

The pandemic has had a significant impact on both consumer demand and production supply in China. Traditional consumer industries such as catering, accommodation and tourism have all suffered a significant impact, but some new forms of online consumption have emerged. Meanwhile, the surge in the purchase of pandemic prevention supplies and life necessities has experienced a short-term price hike.

Given the complex and severe external situation, expanding domestic demand as the key to economic stability has become a consensus. To boost the domestic consumer market, both “short-term policies” and “long-term mechanisms” should be put in place. On the one hand, short-term measures should be taken to revitalize consumption, such as enhancing consumer confidence, speeding up revitalization of traditional consumption, unleashing the potential of the new forms of consumption, and ensuring people’s basic livelihood. On the other hand, efforts should be made to continue to improve the long-term mechanisms for boosting consumption. Specifically, on the basis of ensuring the consumption capacity of different income groups, measures should be adopted to cultivate new engines for income growth. Besides, multi-level carriers of consumption in rural and urban areas should be improved to ensure a more diversified market supply, so as to unleash huge domestic market dividends.

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