China Pushes Hainan as Free-trade Zone for Tech Firms

March 8, 2019

China, as one of the world’s leading economies, has ambitions for Hainan Island to become a hub for startups and tech companies, in order to attract investment as well as promote its domestic economy.

In April 2018, Chinese President Xi Jinping announced that Hainan Island has been designated as the country’s 12th free-trade zone. The move was part of an ongoing effort for China to further promote its tech industry, as previously in 2017, a total of 269 companies had received investment from a fund established with the aim of pushing internet development.

Hainan — a destination some might call China’s Hawaii — is already known for its year-round sunshine and beach holidays. However, with the recent move, Hainan is also set to become the hub of technological innovation in the southern part of the country.

To achieve this goal, China’s government is offering incentives and benefits for startups and tech firms looking to establish themselves in Hainan, with lower tax rates, simpler visa policies, free office spaces, as well as more access to venture capital funding backed by the Chinese government itself.

One of the first leading tech companies in the world to pursue opportunities on Hainan Island was Microsoft, which signed a memorandum of understanding (MoU) with the local administration back in April 2013. The MoU formed a partnership with the aim of propelling Hainan Island to become an international tourism destination and a powerhouse of software development.

Meanwhile, Singapore-based private equity firm Temasek, which has poured funds into companies like Tencent and Alibaba, also signed an MoU with HNA Group in Hainan in April 2018. The agreement is said to open new opportunities for stakeholders in various industries, ranging from aviation and logistics to airport infrastructure.

Other international tech giants have also expressed interest in the island, with SAP and IBM reportedly holding discussions with the Hainan government. Both companies are looking at deals that could lead to the establishment of headquarters on Hainan.

According to a government official, Hainan has a strategic geographical advantage over Beijing or Shanghai, as the island is situated closer to cities in Southeast Asia. The source — who chose to remain anonymous — asserted that multinational companies as well as domestic firms are likely to be attracted to the location and to set up regional headquarters on the island.

The potential of Hainan Island has not been ignored, with Chinese airline and property conglomerate HNA Group having already set up its headquarters there. With the designation of the island as China’s 12th free-trade zone by Chinese President Xi Jinping in 2018, foreign companies can now exercise more freedom in business operations in China’s southernmost province.

Other free-trade zones in the country include Shanghai, Fujian, Tianjin and Guangdong.

China’s State Council has announced that the Hainan free-trade zone would come into effect in 2020 and will reach a “mature” stage in 2035. Industries that will benefit from setting up headquarters on Hainan Island include tourism, medical care, aviation and new energy, as they are given preferential treatment from the government. Benefits include more relaxed restrictions on foreign capital movements and the hiring of foreign employees.

Additionally, the Hainan local administration has set aside a fund with the aim of promoting internet development. The fund — totaling 500 million yuan ($63.7 million) per year — will be used to promote tech startups that demonstrate potential for growth. Movements have already been made since 2017, when 269 companies received capital from the fund, including Chinese telecoms giant ZTE, Microsoft and Tianya, a popular web forum founded in 1999. Though ZTE and Microsoft are not startups, these industry giants are expected to attract more businesses to Hainan Island and solidify its reputation as a tech hub.

The Hainan administration has already welcomed several successful businesspeople in the Chinese tech industry, such as Jack Ma (Alibaba), Pony Ma Huateng (Tencent), and James Liang Jianzhang (Ctrip). The tech leaders gave advice at a conference held to bring together the public and private sectors, in a bid to establish a tech hub on Hainan Island.

Jack Ma gave his opinion that Hainan should learn from the example of Hong Kong as a model of a free trade port. However, he added that Hainan should strive to become more modern to cater to today’s businesses. According to Ma, “To build a digital free trade port and to explore new trade rules in the digital age will be the key for Hainan”.

However, there remain challenges that Hainan must face in order to establish itself as a tech hub in this part of the country. As it is working towards becoming a center for innovation and technology, it must compete with well-developed cities such as Shenzhen, a major electronics manufacturing base as well as home to tech giants such as Tencent, DJI, Huawei and ZTE.  Hangzhou is also another city to watch for, as it is home to internet giants Alibaba and NetEase. To the north of Hainan Island, the Zhongguancun district of Beijing is a veritable Silicon Valley with almost 9,000 tech firms, including Nasdaq-listed Baidu and Sina Corp. The capital also claims top universities like Tsinghua and Peking University, which educate some of the most talented professionals in the tech industry.

Though the determination to establish Hainan Island as a free-trade zone has been established, lawmakers in China have yet to relax capital controls in these areas, including the Shanghai free-trade zone introduced in 2014. Even now, the yuan is still not fully convertible in the Shanghai free-trade zone, one of the many reasons that the area has thus far failed to satisfy investors.

Chen Bo, economics professor at Huazhong University of Science and Technology, as well as adviser to several free-trade zones in China, revealed that Chinese financial regulators have recently been very cautious about easing restrictions nationwide. Due to an economic slowdown, as well as tensions with the United States, more pressure is expected to be placed on capital outflow.

Furthermore, to operate a business on Hainan Island, foreign investors including private equity funds and venture capitals are required to go through complicated bureaucracy. Procedures, including registration with the State Administration for Industry and Commerce, filing documents with the Ministry of Commerce, and filings with the state administration of foreign exchange, translate into more time spent for the companies.

Chen added that for many investors, one of the top concerns regarding the tech hub on Hainan Island is its clear weaknesses stemming from a less-developed economy. In 2016, Hainan’s GDP per capita was around 60,000 yuan, only 30 percent of Shanghai’s GDP over the same period. In the past, Hainan’s economy was based on agriculture, before shifting to tourism in the 1990s.

Some may say, however, that Hainan offers a place for companies to make investments as well as experiment with new ventures at a lower cost compared with other regions, as many areas on the island are still underdeveloped.

Despite its weaknesses as a tech hub, many corporations are already eyeing the potential of Hainan Island and setting up shop. Beijing-based Huobi Group, one of the world’s biggest cryptocurrency exchanges, has moved its operations centre to the island’s blockchain pilot zone. Huobi has reportedly bought three buildings in the Hainan Ecological Software Park, which is home to 175 businesses including US-based information technology firm Hewlett-Packard Enterprise, the Microsoft Technology Centre, and China-based cloud computing service provider ChinaSoft.

Livio Weng Xiaoqi, CEO of Huobi Global, revealed that Huobi is relocating 300 of its 900 mainland-based staffers, including executives, from Beijing to Hainan. He revealed that the local administration granted the companies lucrative tax benefits and allowed Huobi employees to apply for “honorary citizen” status, which will let them purchase property and cars in the province.

Weng added that China is developing the blockchain industry in many cities, including Hong Kong and Hainan, which are the two most likely places to make it big in the industry.

Meanwhile, the Hainan administration is looking to offer more incentives to startups by working with private real estate developers to provide free rent for qualified tech companies, which may prove to become a very attractive offer for businesses.

Sean O’ Sullivan, founder and managing partner at SOSV, a global venture capital and accelerator firm, said the costs of running a business for the first few years can amount to a lot of money, especially for companies based in Beijing and Shanghai, where the cost of living has skyrocketed. He added that though Beijing and Shanghai are attractive due to their status as the financial marketplaces for numerous venture capital funds, it does not mean that businesses must place all their operations there.


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