Hainan Free Trade Port: A game changer?

On 18 December 2025, Hainan became an independent customs zone from the rest of mainland China, marking the full implementation of one of Beijing’s most ambitious policy experiments in the Xi Jinping era — the creation of the Hainan Free Trade Port (HFTP). Launched to transform the island province of Hainan into a globally influential hub for trade, investment, tourism, and innovation, the HFTP will be granted a set of the most liberal and open policies on tariffs, taxation, services, investment, capital flows and visas.

Located off the southeast coast of China and facing the South China Sea, the HFTP is also designated as the grand plan to further integrate the already closely intertwined economies between Southeast Asia and China. Beijing will closely monitor both the positive and negative effects of these policies in the coming years, drawing lessons that will help inform and shape the future direction of economic reforms across the rest of China. 

At the core of the HFTP is the promise of unprecedented openness, covering not just tariffs but a wide variety of institutional reforms. The sealing off of Hainan’s custom border means that most foreign goods can be imported into Hainan with zero tariffs (called the “openness at the first line”) but these goods will be subjected to China’s normal tariff rates when they enter into the rest of the Chinese market (“control at the second line”), unless sufficient value-added processing is done to these goods (30%). Corporate and personal taxation is set at 15%.

Equally important is the liberalisation of investment. The HFTP adopts a “negative list” approach, meaning foreign investors are allowed to operate in all sectors except those explicitly restricted. Under the terms of the HFTP, Hainan now has the shortest negative list for foreign investment access in the country, opening industries such as healthcare, education, finance, and telecommunications to greater full foreign participation. It also has the first negative list in the field of cross-border services trade in the country.

For multinational companies facing barriers elsewhere, Hainan offers a relatively predictable and transparent environment to test long-term engagement with the Chinese market. Citizens of 86 countries enjoy visa-free travel to the province, plus additional incentives for medical tourism and cruise tourism. Policies promoting cross-border capital flows, offshore finance and simplified foreign exchange management are intended to encourage foreign banks, insurance companies and other financial institutions to provide financial services in the HFTP.

If successfully implemented, these financial measures could enhance the international use of the Chinese currency and strengthen China’s integration into global financial systems, even amid external pressures and geopolitical uncertainty. The range of changes being introduced to Hainan led optimists to proclaim that this initiative will be a game changer in the future of Asia-Pacific trade and economic flows. 

The HFTP is a long time in the making. It was first mentioned in April 2018, during a speech delivered by Xi Jinping in celebrating the 13th anniversary of the creation of Hainan as a separate province and the establishment of the Hainan Special Economic Zone. A policy document was also issued jointly by the party centre and State Council, giving the HFTP four primary roles or missions: as a pilot zone for all-round reform and opening up, a pilot zone for ecological conservation, an international tourism and consumption destination and a service zone for implementing China’s major economic strategies.

In October of that year, the State Council formally approved the pilot zone of the HFTP with the issuance of a pilot zone work plan. A national law of the HFTP was passed by the National People’s Congress in June 2021, securing the legal foundation of the initiative. The preparatory work to seal off Hainan’s customs from the rest of China began in April 2022. 

Between 2020 and 2024, Xi inspected Hainan a number of times to check on the readiness of Hainan. During these years, the preliminary implementation of HFTP-related policies also induced a significant growth in Hainan’s foreign trade volume and inbound foreign direct investment.

Trade reported registered annual growth of more than 30% while foreign investment grew at an average annual rate of 14.6%, significantly outpacing the national averages. Before the introduction of the HFTP, Hainan’s economy was overly dependent on the property sector.

Hainan’s economy could have suffered a worse fate in the past few years with the crash of the property sector in China’s economy, if not for the diversification and transformation of Hainan’s economy due to the introduction of HFTP-related policy measures and institutional innovations. 

Does all this make the HFTP a true game changer? And will the HFTP transform Hainan into an economic powerhouse province? On the positive side, it is a bold statement of China’s continued commitment to the reform and opening up agenda, even as some countries move toward protectionism. It offers a concrete platform for institutional innovation, potentially shaping the future of China’s economic governance. For businesses, it provides new opportunities in one of the world’s largest markets under increasingly flexible rules.

Yet significant challenges persist. The preferential policies for Hainan, while impressive on paper, may turn out to be less impactful upon closer scrutiny. For instance, the zero-tariff policy certainly points to the greater openness of the HFTP, but under the terms of various free trade agreements that China has signed, including the China-ASEAN Free Trade Agreement (CAFTA) and the Regional Comprehensive Economic Partnership (RCEP), China’s tariff rates for most goods have already gone down substantially.

HFTP’s zero tariffs certainly still offer foreign exporters (especially for countries without free trade agreements with China) better access to the Hainan market and to the Chinese market after value-added processing. But traders do not just look at tariffs, but also the convenience and accessibility to the main markets as well.

On its own, Hainan is not a big market, and its distance from the main consumer markets of China, such as the Pearl River Delta and Yangtze River Delta, will add logistical costs to the foreign exporters or Chinese importers as well. The zero-tariff policy will perhaps encourage more manufacturing investment meant to export to other countries, rather than open up greater access into the Chinese market.

The impact of the much touted “shortest negative list” for foreign investment in the HFTP, especially in the service sector, may have a lesser impact than expected. When the negative list of the HFTP was first announced, it contained 27 items, compared to the negative list of other free trade zones in China (30 items) and the national negative list (33 items). The gap has now substantially reduced. The latest national negative list for the whole of China is now 29 items, not that different from HFTP’s list. In certain items HFTP still enjoys greater flexibility, but fewer foreign investors could be enticed than expected. 

The low corporate and individual income tax policies certainly will help boost Hainan’s attractiveness as a destination for foreign investment and as a regional or even global headquarters for multinationals. Nonetheless, companies and entrepreneurs are not only looking at taxation but also the overall quality of life, availability of talent, ease of doing business, and regional networks when making decisions to relocate.

A talented professional will consider factors such as the educational services available for his or her children and the quality of leisure activities, rather than purely income tax, in moving to Hainan. Education, healthcare and urban services must continue to improve if the island is to support a globally competitive business environment.

The visa-free policy is also hampered by the fact that Hainan’s air connectivity remains poor. Direct flights to Hainan’s cities remain few, adding costs in time and flight and reducing the appeal of Hainan as a hub of tourism, international meetings, exhibitions and conventions.    

Geopolitical factors further complicate the picture. Trade tensions, technology restrictions and strategic rivalries influence how foreign companies assess risk and opportunity. The success of the HFTP will partly depend on China’s broader relationship with the global economy and its ability to reassure partners that openness and cooperation remain central goals.

Hainan is likely to have a five- to ten-year window before the effects of its preferential policies begin to fade. The next decade will be the most crucial. If Hainan can translate ambitious plans into consistent, credible outcomes, it could redefine how China engages with the world and provide a powerful model for future reform. If not, it risks becoming another well-intentioned initiative that falls short of its transformative promise.

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