China has launched a huge free-trade experiment  

Chinese officials gush about their decision to turn the tropical island of Hainan into the world’s largest free-trade port (FTP). They describe the move, which took effect in December, as a “substantial leap” in the country’s opening to foreigners seeking to tap China’s vast markets. Amid global trade tensions, they call it evidence that China is bucking an American-led trend towards greater protectionism. Hainan has a long history of such boosterism, and of failing to impress beyond its sandy beaches and five-star resorts. Will this time be different?

When China’s leader, Xi Jinping, first announced the free-trade plan for Hainan in 2018, some observers wondered whether he intended to build a new Hong Kong—a free-trade hub that plays a vital role for foreigners as a gateway to China’s markets and as a China-linked financial centre. For now, Hainan’s ambitions are more modest, even though the area covered by the FTP is huge: the island is nearly the size of Taiwan and 30 times bigger than Hong Kong. But it is taking a leap.

The new FTP means that 74% of goods can now enter the island without tariffs. They can be shipped to the mainland on the same zero-levy terms as long as they undergo processing in Hainan that adds at least 30% to their value. To lure investors and talent, taxes on firms in strategic sectors and on high earners will be capped at 15%. That compares with 35% and 45%, respectively, on the mainland. Hainan also aims to make it easier to move capital across borders, but its financial system will remain more restricted than freewheeling Hong Kong. Citizens of 86 countries, including America, can visit visa-free.

For Hainan to achieve its goal of becoming a “globally influential” FTP by mid-century, it will have to work hard to shed its reputation as a backwater. It has been burdened with this since imperial times, when politicians and poets who had offended the court were banished there. In 1984, when the central government gave Hainan permission to import foreign goods that were restricted elsewhere in China, the island became notorious for a massive profiteering scandal. Four years later Hainan got a chance to rebrand itself when it was carved out of Guangdong as a separate province. It was designated as the country’s only provincial-scale special economic zone (SEZ), authorised to experiment with liberal economic reforms. But results were mixed.

Its tourism industry boomed. Residents of China’s frigid north, as well as Russians, flock there in winter. In spring global bigwigs fly in for the Boao Forum, China’s answer to Davos. Space-geeks and thrill-seekers head to Hainan, too: China’s most powerful rockets launch off its coast. But the island’s economic performance has been lacklustre. Frenzies of investment have given way to property busts and abandoned theme parks.

At about 76,000 yuan ($10,900), its GDP per person in 2024 trailed that of most of China’s other SEZs and the national average (see chart). The province’s GDP that year, about $114bn, was one of China’s lowest. Compared with wealthy, glitzy Shenzhen, China’s flagship SEZ bordering Hong Kong, Hainan is desolate: unhelped by a lack of infrastructure across a 20-30km stretch of sea separating it from the mainland (pictured is a port in Haikou, the capital, from which goods are shipped over).

But that isolation, and the island’s remoteness from overbearing bureaucrats in Beijing, 2,300km to the north, could prove an asset for the FTP scheme. The island sees itself as well-suited geographically for reform experiments, which can be carried out without risk of disrupting other parts of China. One that will be watched closely is a pilot, introduced last year, that allows firms to apply for less restricted access to the internet. This allows users to visit sites such as Google and X that are blocked on the mainland.

Leaders in Beijing may reckon that a bit of risk-taking on Hainan could prove beneficial: they are keen to signal to investors that the country is still reforming as economic growth slows. Mr Xi calls the FTP’s creation a “landmark” move to promote “an open world economy”. The project has no shortage of cheerleaders. “This youngest and bravest student in a cohort is given permission to swim in the deep water,” says Li Daokui of Tsinghua University, who is a government adviser. “Then the whole class would watch what Hainan would do.”

Hainan hopes that a big beneficiary of its new trade rules will be medical tourism. It has set up a “special medical zone”, called Boao Hope City. Amid its fields of coconut trees, private hospitals have sprung up. They are allowed to use drugs and devices approved abroad but not in China. Some are struggling to attract customers. But at one, patients in blue tracksuits have paid at least 500,000 yuan for an annual membership while those in orange have forked over at least 1m yuan. Its resort-like rooms are fully booked by rich Chinese.

Processing industries are showing interest in the FTP. Mixue, a popular Chinese cold-drinks company, has opened a factory there because it can import coffee beans tariff-free and then turn them into drinks that can be sold elsewhere in China without extra duty. Through a subsidiary, Swire Pacific, a Hong Kong firm, is also building a new factory for bottling Coca-Cola for the China market.

But some foreign businesspeople say Hainan remains uncompetitive with established manufacturing centres on the mainland, lacking talent and well-integrated supply chains. “The business case is just not there,” says an auto executive who was encouraged by a senior official to invest in Hainan.

To counter such impressions, Hainan has been sponsoring trips to the island for potential investors from the mainland. After such a visit, Lei Jun moved his video-game design firm from Fujian province to Lingshui on Hainan’s south-eastern coast. He says he was won over by the climate and subsidies.

Mr Lei’s employees live and work rent-free in villas built during a push that began in 2009 to turn Hainan into an “international tourism island”. The buildings had previously fallen into disuse—a reminder of the island’s capricious fortunes. Recruitment is hard for Mr Lei: he, like many bosses on Hainan, has to find skilled workers who are willing to move from the mainland. But there may be a future pipeline: down the road, the government is building 26 campuses for universities from Britain, Canada and across China. Some have already opened.

To foreign firms, education, health care and other service industries may offer brighter prospects than manufacturing, at least initially. Chi Fulin, 74, was among the first batch of officials sent to Hainan from Beijing in 1987. Now president of the China Institute for Reform and Development, a state think-tank based in Haikou, Mr Chi says Hainan will lead the opening up of the country’s service sector, which has largely been closed to foreign firms. The province now has the shortest negative list for foreign investment in such businesses.

Mr Chi, who has devoted his life to Hainan’s reform, is cautiously optimistic about the FTP project. He illustrates this with a metaphor referring to the reluctance of locals to give up their tropical garb even during cold snaps. “You might say that Hainan, where people wear down jackets on top and flip-flops below, has a lot of inertia,” he says. “Changing these habits is a long-term process. But if the overall environment changes drastically, if it snows heavily, can you still wear flip-flops?” On Hainan, wintry gusts may be welcome, if they blow in freedom to reform. ■