MNI EXCLUSIVE: Free Port Plan May Hint At Future China Opening

--Success Of Hainan Could Encourage More Economic Opening, Advisors Say

     BEIJING(MNI) - China's plans to create the world's biggest free trade port

in the southern island province of Hainan may be a test case for how far the

government is prepared to open up the world's second-largest economy, a former

deputy commerce minister told MNI, although policy advisors said earlier

proposals for a separate financial system meant to rival Hong Kong had been put

aside.

     Under multi-stage plans announced by President Xi Jinping earlier in June,

the island, slightly bigger than Belgium, will apply zero tariffs on most

products, and enjoy lower income tax as well as relaxed investment restrictions

and visa requirements for foreign tourists and professionals. Manufactured

products sent from Hainan to the rest of China will be duty free, provided 30%

of their value is added in the province.

     Once Hainan's plans are fully implemented, its degree of business freedom

will surpass that of Dubai, Singapore or Hong Kong, said Wei Jianguo, a former

deputy minister of commerce, adding that the province's eventual success could

encourage tax and other economic reform, if on a more modest scale, in the rest

of China.

     "China needs to open up more, deepen reform to move forward after reaching

this size," said Wei, now vice chairman of the China Center for International

Economic Exchange.

     --LOW TAXES

     Dozens of free trade zones already exist across the country testing new

policies to facilitate business and investment, but they need to be bigger if

China is to tap the potential of its 1.4-billion-strong market, said Wei,

although he acknowledged that the degree of liberalisation in a small area like

Hainan could not practically be extended throughout the world's most populous

country.

     Rates of 15% for corporate tax and 3-15% for personal income tax will make

Hainan an attractive base for companies, said Liu Huan, a counsellor of the

State Council, adding that corporate tax rates could eventually be lowered in

the rest of China, where it is currently set at 25%. Hainan's corporate rate

compares to 21% in the U.S., 17% in Singapore and up to 16.5% in Hong Kong, he

noted.

     But the plans for Hainan lack one aspect previously advocated by some

policy advisors, who had argued that it should be exempt from China's capital

controls, in order to develop a global trade hub. The government rejected the

idea, on the grounds that capital account liberalisation should be extended

throughout the whole country at the same pace, said a policy advisor.

     The fact that the yuan is not fully convertible will mean Hainan cannot

rival other global financial centres under current policies, said Guan Tao,

former director general of balance of payments at the State Administration of

Foreign Exchange and now chief global economist with BOCI securities.

     --HONG KONG

     Instead, Hainan's special status will allow it to complement, rather than

compete with Hong Kong, said Wei, with the island province focussing on tourism,

modern services and attracting high-tech manufacturing, while Hong Kong

concentrates on finance and shipping. Hainan can tap Hong Kong's financial

services and highly-skilled professionals, boosting the territory's financial,

legal, trade and investment sectors.

     Hong Kong's position adjacent to one of China's main manufacturing hubs

also provides a different set of strengths to those of Hainan, said Cui Fan,

professor in international trade with the University of International Business

and Economics.

     "Hainan should be a bond connecting the rest of China with the world ...

its development must rely on the advantages of the massive Chinese market," said

Cui.

     Proposals for a free-trade port have circulated in China since the 1980s,

when Xi Jinping, then deputy mayor of the city of Xiamen on the Taiwan Strait,

participated in planning. The Xiamen free port was never implemented, but now

the Chinese president is spearheading the Hainan plan himself, policy advisors

said.

     "Free trade ports usually play a better role when a country has opened up a

bit but not fully opened, which is China's current status ... The central

government wants to build the region into a poster child for further opening

up," the anonymous policy advisor said.

     But the advisor added a note of caution as to the prospects of extending

Huanan's tariff experiment more widely.

     "Under the current circumstances, even the U.S. is increasing tariffs. How

could China just declare the whole country zero tariff?" the advisor said.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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