China Starts Massive Free-Trade Experiment on Hainan Island

Post by : Saif Nasser

China has taken a major economic step by turning its southern island province of Hainan into a large duty-free trade zone. The move is part of Beijing’s plan to attract foreign investment, strengthen trade ties, and show the world that China is serious about opening its economy further.

Hainan, an island about the size of Belgium, now operates under special customs rules that separate it from mainland China. Goods produced on the island with at least 30% local value can enter the rest of China without tariffs. This is expected to lower costs for businesses and encourage companies from around the world to invest and set up operations there.

Chinese officials hope Hainan will grow into a major business and trade hub, similar to Hong Kong. The new rules also allow foreign companies to work in service sectors that are still limited or restricted in other parts of China. These include areas such as finance, tourism, healthcare, and professional services.

Vice Premier He Lifeng said the Hainan Free Trade Port should become an important gateway for China’s next stage of opening up to the world. He described the project as a long-term strategic decision made by the Communist Party, keeping both domestic and global challenges in mind.

The timing of this move is important. China’s economy has been under pressure from global trade tensions, including high tariffs imposed by the United States. These challenges have pushed Chinese leaders to reduce dependence on a single market and strengthen China’s role in global supply chains.

China is also trying to improve its chances of joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, known as the CPTPP. This is one of the world’s largest free-trade agreements and includes countries from Asia and the Pacific. By using Hainan as a testing ground, Beijing hopes to show it can meet the group’s high trade and investment standards.

At the same time, China is facing a decline in foreign investment. Official data shows that foreign direct investment fell by more than 10% in the first three quarters of 2025. Leaders want to reverse this trend and shift the economy away from heavy reliance on government stimulus. Their new focus is to balance consumer spending with long-term investment.

Experts say Hainan could benefit greatly if the plan succeeds. The island already plays an important role in tourism and has a strong location close to Southeast Asia. Supporters believe it could become a key logistics and trading center linking China with nearby regions.

However, challenges remain. Hainan’s economy, valued at around $113 billion, is much smaller than Hong Kong’s. Analysts also point out that Hainan does not yet have the same legal systems, financial openness, or global trust that helped Hong Kong succeed. Competition from Southeast Asian countries and Japan could also limit its growth.

Some trade diplomats are cautious about the project. They note that joining the CPTPP requires opening the entire national economy, not just one region. Until China shows broader reforms across the country, doubts about its readiness may remain.

Still, Hainan represents China’s bold attempt to test deeper market reforms in a controlled way. If the experiment works, it could shape future economic policy and bring China closer to its goal of stronger global trade integration.