heyn March 10, 2023, Xi Jinping formally begins anti-predecessor third term, the formal National People’s Congress (NPC) confirmed him as the President of China for the next five years. The first decade of the Xi era, defined by China’s return one man rule and the end of the collective leadership model ended with three years ‘Zero-Covid’ Policy Essentially isolating China from the rest of the world.
A decade into what Beijing has declared “A New Era” Under Xi, China stands at a crossroads. Beijing faces searing questions about its place in the world, and many observers, both in China and abroad, are asking whether the reform era, which saw China open up and integrate with the world, is over. Has gone. A three-year separation only reinforced those notions.
a grand plan for hainan
Forty years ago, China stood at a similar crossroads. In 1992, Deng Xiaoping embarked on a “southern tour” from Shenzhen to give his stalled reforms a second wind, just three years after the Tiananmen events had shaken China and the world. Right after last year’s NPC session, when Xi took a leaf out of the Deng playbook, he decided to start the final year of his second term with a southern tour of his own.
File photo of Chinese President Xi Jinping delivering a speech via video link in Hainan province. , Photo Credit: AP
Xi went even further south, to the island province of Hainan, where he called for expediting plans to build what is being billed as China’s first “free trade port” (FTP). The trip went largely unnoticed given the poor end to Xi’s second term that followed in the following months. Many, including Hainan, had draconian zero-Covid lockdowns; unprecedented protests in November; And finally, suddenly, almost overnight, the return of the policy next month.
A picture of Haikou in China’s southern Hainan province. , photo credit: AFP
Now that the zero-Covid walls have come down and Xi has secured his third term, Beijing’s attention is turning to kick-starting its beleaguered economy, which is not only grappling with the after-effects of its Covid policies. but is also grappling with other long-standing problems. Such as rising local government debt and the sick property sector. Complicating its efforts are deteriorating relations with the West and the US in particular, and trade and technology tensions that threaten to derail Beijing’s quest to become the world’s largest economy and a leading global innovation power .
Xi’s plans for Hainan provide a clue into China’s broader strategy to deal with these headwinds and deepen its position as an economic linchpin for the region. The FTP blueprint is certainly ambitious. Last year, Xi called for the first phase of the plan to be accelerated, which aims to establish the 35,000 sq km island as China’s most open economic zone by 2025. The ultimate goal is to build a tropical Dubai in the middle of the South China Sea. 2035. The stakes are huge for Beijing and the region. “After Shenzhen and Shanghai,” says Wang Duxue, a Hainan government official, “this will be the third most important event in China’s reform and opening up history.” However, the jury is out on whether Hainan will be a transformative success story like Shenzhen or like Shanghai’s much-anticipated free trade zone launched a decade ago.
Residential buildings in Sanya, in China’s southern Hainan province. , photo credit: AFP
experiments in progress
Hainan, a lush tropical island closer to Hanoi than Beijing, is an unlikely location for a potential global trade hub. It is located just off the Chinese mainland in the crystal-clear waters of the South China Sea. Tourism drives its economy, with millions of mainland tourists descending on the island each year to enjoy the tropical weather and beaches. Home to 10 million people, the island was split off from Guangdong Province and given its own administrative status in 1988. Since then, it has been used as a testing ground for economic reform policies. Property reforms were implemented in Hainan and later throughout China in the early 1990s, leading to a real estate boom. It accelerated Chinese economic growth for three decades.
The FTP plan would essentially establish Hainan as a separate administrative trading unit within China by 2035. At its heart is what is being called a “free flow through the first line, control on the second line” model. Goods can enter Hainan freely from overseas in the “first line”, with normal customs checks only kicking in on the “second line” if they enter the Chinese mainland later. This is the first trading arrangement of its kind for China. The plan proposes the “five frees” – another first for China – referring to free trade, investment, cross-border capital flow, transportation and exit and entry. How “free”, especially on the fifth point, remains uncertain, given China’s generally tight immigration controls.
The broad idea is to attract foreign enterprises – particularly from Southeast Asia, given its proximity – to use Hainan as a base for business, offering incentives such as zero tariffs and the lowest tax rates in China. make offers.
Haikou, the sprawling and modern capital in the island’s northern end, and Sanya, a tourist paradise and a naval base in the far south, are the plan’s twin economic engines. The infrastructure is already in place. A bullet train link built in 2010 runs along the east coast of the island, covering the 300 km distance between the two cities in just over 90 minutes.
Since the FTP’s announcement in 2018, progress on the plan has been measuredly steady, if uneventful. Three years of zero-Covid have hardly been the best advertisement for openness. The province’s $64 billion GDP places it fourth from the bottom of China’s 31 provinces, only higher than the western provinces of Ningxia, Qinghai and Tibet. In 2021, foreign investment was $3.5 billion. The number of foreign-funded companies, however, nearly doubled, to slightly less than 2,000.
There is a cluster of skyscrapers in the northeastern suburbs of Sanya. The “tax-free city” is still a work in progress — massive construction cranes dot the landscape — but there were long lines outside luxury goods stores on a recent afternoon. For years, Chinese consumers have traveled abroad to acquire luxury goods, from Louis Vuitton handbags to Tiffany’s jewelry. Zhao Jing, a director of the tax-free city, explains that the idea now is to redirect them within China. City regulations allow Chinese citizens to buy duty-free goods as long as they have a flight ticket from Sanya to anywhere in the mainland. Once purchased, the items will be placed at Sanya Airport for pick up. Elaborate arrangements are in place to prevent black market sales.
People queue to enter an Alexander McQueen store at a shopping complex in Sanya, Hainan province, China. , photo credit: Reuters
Duty free goods and free trade are not the only experiments going on in Hainan; The island is also serving as a testing ground for China’s new energy transportation policies. By 2030, Hainan will completely ban the sale of fuel cars. The growth of electric vehicles (EVs) on Haikou’s streets – easily spotted by their green license plates – is the fastest in China due to the tax exemption policy. The number of electric cars in the province has increased from 20,577 units in 2018 to 1,91,937 in 2022, increasing from 1.62% of all vehicles to 10.46% now. This is the highest proportion anywhere in China. It is also noteworthy that most of the cars are of domestic brands. The only foreign EV maker in the top five in terms of sales in 2021 was Tesla. It ranks fifth, accounting for 5% of the market, behind Chinese carmaker BYD, which has a 14.4% share.
Sanya Shopping Complex. , photo credit: Reuters
Experimentation has been crucial to the success of economic reforms in China since the 1980s. The policies have previously been tested in select cities or regions. Those that worked were rolled out elsewhere, while those that failed were quietly shelved. That’s why, Hainan officials point out, the FTP is being introduced in phases before 2035 to see what works. Beijing hopes that by then, Hainan will be giving some competition to Hong Kong.
hurdles to cross
However, there are several hurdles that remain. A major reason the reform process, described by Deng as crossing a river by feeling stones, worked earlier was the political decentralization pushed by Deng. The provinces were given space to make their own policies. Perhaps the greatest political legacy of the Xi era is the rolling back of provincial autonomy. In recent interviews, officials from two local provinces said that some policy paralysis had been observed in the bureaucracy in recent years because the fear of getting the decision wrong was too great, so much so that doing nothing was a safer option. To what extent Hainan’s opening up will be micromanaged by Beijing or left to local officials is an open question.
Another major hurdle is regarding the legal protections on offer as far as foreign investors are concerned. Hainan’s FTP plan promises international standards. In the years of Jiang Zemin and Hu Jintao, China implemented a series of judicial reforms to professionalize the courts and create conditions that would enable the flow of foreign investment and enterprises, which contributed to China’s party-controlled legal system. Despite this, it did a remarkably good job of attracting business. However, the current perception among most foreign companies is that the past decade has already seen a modest judicial autonomy and a re-assertion of party control.
The other overarching tension of the last decade has been between China’s desire to integrate more closely with the world economically while exercising Chinese power more assertively. Some of the countries that Beijing is trying to attract to Hainan are those that are countering Beijing’s growing military presence in the South China Sea.
Relations with India are another matter. A growing trade relationship continues, but the influx of Chinese investment into India, which both countries saw as a positive force for economic integration, has waned following People’s Liberation Army transgressions across the Line of Actual Control before 2020. It is done. (LAC). While the standoff at the LAC, and India-China relations, is still unresolved, Xi has begun his third term to woo the region, at least tactically, elsewhere, and in the midst of Beijing’s primary strategic challenge – the US China is positioning itself as a protector of globalization and developing countries, a message that a Belt and Road summit later this year is expected to reinforce.
In fact, this is also the overarching message of the Hainan project. “Hainan is a shining example of China’s commitment to the future,” says Zhou Li, a foreign ministry counselor in Beijing. “This highlights China’s resolve to open up further. A free trade port represents the world’s highest level of openness, and shows that China’s door will not be closed, but will open wider and wider.