SCIO briefing on master plan for Hainan Free Trade Port

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China News Service:

We know the construction of Hainan FTP with high quality and high standards cannot go forward without the active participation of a large number of high-quality market players. What are the core policies of Hainan FTP that enterprises can directly enjoy? Thank you.

Shen Xiaoming:

I remember that in the important speech made by General Secretary Xi Jinping on April 13, 2018, he stated: "China welcomes investors worldwide to invest and start businesses in Hainan and participate in the building of a free trade port, thus sharing the country's development opportunities and outcomes of its reform." The construction of the FTP requires market entities, and they need to understand what policies we have established for them. As soon as the master plan was announced on June 1, we extracted 60 pieces of essential information about preferential policies from the master plan and publicized them via the WeChat public account platform. In the first 40 minutes, the article attracted over 100,000 views, and after two-and-a half hours that exceeded 500,000. This indicates market players are very concerned about the policies of Hainan FTP. As there are many policies, here I will choose four of them for simple interpretation.

First is the freedom and convenience of investment. The Hainan FTP will implement a policy of "all can enter if not prohibited," which means that, unless there are compulsory standards and legal prohibitions involved, the government, in principle, cancels permits and approvals, and replaces this with a system of filing and commitment by enterprises. If the commitment meets the conditions, then the business can begin operating. The government agency handling the filings will fulfill its regulatory obligations through supervisions during and after completion of the investment. It implements a pre-entry national treatment plus a special FTP negative list management system for foreign investment. We will further reduce restrictions and prohibitions on the basis of the normal procedures of a free trade zone. For domestic enterprises registered in the FTP, we will support them to raise funds by issuing shares overseas. In addition, if they are engaged in tourism, a sector of the modern service industry, high-tech industries and other areas we wish to encourage, the direct investment income from abroad can be exempted from corporate income tax. Therefore, in terms of investment freedom and convenience, this is a very complete system.

Second is the zero tariffs on trade in goods. After the whole island seals the customs, except for a few special products, no more import tariffs will be imposed. However, before the whole island was closed for the FTP, we also set four types of items exempt from customs duties through list management. They are production materials, raw and auxiliary materials, transportation vehicles, and consumer goods for island residents. I have roughly calculated that the tax cost of importing yachts, for example, can be reduced by about 38%. Originally, when you spent 10 million yuan in importing a yacht, you needed to pay 3.8 million yuan in taxes. But if you buy a 10-million-yuan imported yacht in Hainan, you don't need to pay the 3.8 million yuan in taxes. So you save 3.8 million yuan here, than buying yachts elsewhere. In addition, for the tax on imported entertainment equipment, you can save about 20%. Just a few days ago, I went to a biopharmaceutical R&D service outsourcing company in Haikou to undertake a survey. The person in charge told me that he planned to buy R&D equipment. Before the zero tariffs policy, he would have needed to spend 300 million yuan; now, the cost is only 200 million yuan, saving him one-third. Thus, the cost of building a R&D center in Hainan is lower, and he could buy more equipment and hire more people for the same amount of money. What's more, the Yangpu Bonded Port Area and other special areas will be the first to implement the rules of origin. What does this mean? It's when you have imports among your raw materials for production, if you can achieve more than 30% in added value in a designated sector, the products you produce will not need to pay tariffs when they enter the Chinese mainland market again. Let me give you an example for frozen products. The annual import of frozen products of beef, mutton and pork in our country is about 6 million tons. The import of frozen products in 2019 increased by 45% compared with 2018, and it is growing rapidly each year. Taking beef as example, the general import tariff for whole or half cattle is 70%, and the import tariff for most-favored nations is 25%. If the whole or half cattle are imported through Yangpu Port, they will be divided into thigh meat, beef tendon, etc. through preliminary processing, making it easy to add 30% in value. If that is achieved, the beef will enter Chinese mainland market avoiding 70% or 25% of the tariff. Therefore, the profit margin of the enterprise is very huge, and the common people can eat cheaper imported beef. This means the rules of origin are extremely important monetarily.

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