China Opens Hainan to Global Capital in $113 Billion Free-Trade Bet
Key Highlights
- China has formally separated Hainan from the mainland for customs processing, turning it into a duty-free trade zone.
- Beijing is using the island as a pilot to bolster its bid to join the CPTPP, one of the world’s largest trade blocs.
- Economists say Hainan’s success could embolden broader liberalisation, but doubts remain over whether it meets CPTPP standards.
China has taken a decisive step to carve out a new model of trade liberalisation, formally separating the southern island province of Hainan from the mainland for customs processing. The move effectively turns the Belgium-sized island into a duty-free zone, allowing qualifying goods to flow into the rest of China tariff-free.
A Customs Breakaway With Global Ambitions
Officials hope the experiment will help transform Hainan into a Hong Kong-style commercial hub, while also strengthening China’s case to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a trade pact with some of the world’s highest standards for market openness.
Under the new framework, goods that achieve at least 30% local value addition in Hainan can enter the mainland without tariffs. Foreign companies will also be allowed to operate in service sectors that remain restricted elsewhere in China, marking one of Beijing’s boldest liberalisation experiments in years.
Hainan as a Signal to Global Investors
Chinese policymakers see the Hainan Free Trade Port as a magnet for foreign investment, particularly at a time when confidence has weakened. Official data shows foreign direct investment into China fell 10.4% year-on-year in the first three quarters of 2025, underlining the urgency behind Beijing’s push.
Vice Premier He Lifeng, speaking at the port, called on officials to build Hainan into “a vital gateway leading China’s new era of opening up to the world.” He described the initiative as a “major strategic decision” by the Communist Party, framed against a shifting global environment.
Trade Politics and the CPTPP Question
Beyond economics, the Hainan project carries clear geopolitical weight. China has been lobbying to join the CPTPP, a 12-member bloc that includes Japan, Australia, and several Southeast Asian economies. Membership would require deep reforms in state subsidies, market access, and regulatory transparency.
Beijing argues that pilot zones, such as Hainan, demonstrate its willingness to meet those standards. Economists, however, remain divided.
“The benchmark is something similar to Hong Kong,” Ran Guo of the China-Britain Business Council said, noting that the island could boost tourism, manufacturing, and foreign investment while serving as a logistics hub linking China to Southeast Asia.
Yet others warn that the comparison has limits.
Why Hainan Is Not Hong Kong Yet
Hainan’s economy, valued at $113 billion, is roughly equivalent to the world’s 70th-largest economy, according to World Bank comparisons, which are far smaller than Hong Kong’s $407 billion output.
“The Hainan model offers managed liberalisation that could help reintegrate supply chains,” said Xu Tianchen of the Economist Intelligence Unit. “But it lacks the legal system and financial openness that Hong Kong boasts.”
Furthermore, the competition looms large. Southeast Asian economies and Japan already offer open trade regimes, efficient logistics, and established legal frameworks, raising questions about whether Hainan can truly stand out.
Trade negotiators are also sceptical that CPTPP members will be persuaded by a single regional experiment. One Western diplomat, speaking off the record, told Reuters that accession requires nationwide commitments, not just isolated zones, particularly given China’s recent trade frictions with Japan over Taiwan.
A High-Stakes Test for China’s Reform Path
For Beijing, the stakes go beyond Hainan itself. If the island’s liberalisation drive succeeds, economists say policymakers may feel emboldened to expose more of China’s economy to market forces, potentially reshaping trade and investment rules nationwide.
Hainan remains a test case one closely watched by global investors and trade partners alike. Whether it becomes a genuine gateway to deeper reform or remains a contained experiment could determine how far China is willing, or able, to open its economy in a more fragmented global order.
