The Hainan Free Trade Port (4): Development of Port Economy
10 February 2022
C H Poon
According to the Overall Plan for the Construction of the Hainan Free Trade Port (Overall Plan), island‑wide independent customs operations will be launched in Hainan some time before 2025. Through an import and export management system described as "free flow through the first line and control at the second line"1, the Hainan Free Trade Port is expected to offer import tariff exemptions for most goods. Making the Hainan Free Trade Port a duty-free zone will help expand tourism, retailing, logistics and processing industries. While Hainan prepares for independent customs operations, the Yangpu Bonded Port Area is operating as a pilot zone for the “first line, second line” model.
Located 130 km and 260 km from Haikou and Sanya respectively, the Yangpu Bonded Port Area occupies a site of 2.26 sq km in northwestern Hainan and forms part of the Yangpu Economic Development Zone. Established in 1992, the Yangpu Economic Development Zone has an area of 114.78 sq km2 and is now an integrated zone hosting companies engaged in port logistics, manufacturing and commerce. As in 2021, the Yangpu Port has 47 shipping berths of different types, accounting for 76% of the throughput of foreign trade goods of the whole province3. The Yangpu Economic Development Zone is also home to a maturing manufacturing base. In 2020, the industrial output value of Yangpu accounted for 33% of the provincial total4. As one of Hainan’s industrial and foreign trade hubs, as well as a “first line, second line” pilot zone, Yangpu’s development potential is huge.
To understand the development potential of the Yangpu Port, it is necessary to understand its importance to the development of the Hainan Free Trade Port. Unlike a number of mainland provinces and autonomous regions where economic development radiates out from one or several core areas, Hainan’s economic centres are dispersed along the island’s coastline. Haikou, the provincial capital, is an industrial and commercial centre, while other coastal cities including Sanya, Qionghai, Wenchang and Dongfang have different characteristics in their economic development. If there is one port that can consolidate goods for export from all cities in Hainan and provide sufficient international shipping routes to connect with overseas markets, it would serve as a cost-effective logistics solution to Hainan.
The Yangpu Port is 10 to 24 metres deep and stretches over 30 kilometres along the coastline, sheltered from natural disasters like typhoons and open to shipping over 330 days a year. At present, the Yangpu Port has 36 domestic and international routes, connecting itself to most major ports in Southeast Asia, and is the only Customs-designated imported meat and grain inspection sites in Hainan. Goods imported through the Yangpu Port are shipped by lighters or overland to Haikou, Sanya and elsewhere. Thus, the port assumes a leading position in Hainan’s shipping logistics.
Nevertheless, Yangpu’s importance to the development of Hainan is not limited to contributing to the local economy; it links Hainan to international markets. At a time when China is pressing ahead with the development of its western region and opening-up, Yangpu can connect China’s western region with global supply chains as a shipping channel. According to an overall plan (Chinese only) issued by the National Development and Reform Commission in 2019 for the development of a new western land‑sea corridor, the Yangpu Port will serve as an international container hub within the region. It will, together with the Beibu Gulf in Guangxi, become the sea access point for provinces, municipalities and autonomous regions in western China, such as Chongqing, Sichuan, Guangxi and Guizhou, and connect to the Silk Road Economic Belt and 21st Century Maritime Silk Road (“Belt and Road”). This means that exports manufactured in Hainan and western China, as well as imports from Belt and Road countries shipped to China via sea routes, can all use Yangpu as a hub port. Hainan can also take advantage of Yangpu’s regional advantage to develop processing and petrochemicals industries and shipping services to diversify the development of the free trade port. Yangpu looks set to play a crucial role in the development of the Hainan Free Trade Port.
Because of the unique importance of Yangpu to the development of the Hainan Free Trade Port, the central government has rolled out a number of policies for Yangpu specifically or for Yangpu’s implementation on a pilot basis. These include, in particular, the Interim Measures of the Customs for the Collection and Administration of the Taxes on the Domestic Sales of Goods with Added Value from Processing in the Yangpu Bonded Port Area released in July 2021. According to these measures, goods with local processing exceeding 30% value‑added will be exempt from import tariffs on materials if they leave the Yangpu Bonded Port Area for sale in other parts of the mainland before 31 December 2024. This applies to materials for goods produced by enterprises in encouraged sectors registered in the Yangpu Bonded Port Area and filed with the Yangpu Economic Development Zone Administrative Committee. However, import value‑added tax and consumption tax will still be levied. Enterprises in encouraged industries can use imported tariff-exempted parts and raw materials to produce goods. If the value-added from processing exceeds a certain ratio, 30% in Yangpu, the goods will enjoy tariff-free treatment when sold in the domestic market. This is the essence of the “first line, second line” model. The Yangpu Bonded Port Area will pilot this management model which will be implemented in the entire Hainan Free Trade Port in the future.
This model is particularly important for enterprises engaged in export processing activities. According to the World Trade Organisation, China’s most-favoured-nation import tariff rates for 67.2% of non-agricultural tariff items were greater than or equal to 5% in 2020. The “first line, second line” model obviously can help reduce costs for the enterprises concerned. Although Hainan currently offers zero-tariff treatment island-wide for raw and auxiliary materials, this policy is carried out through a positive list, meaning only the 356 raw materials listed are eligible.5 Hence, the central government’s implementation of a zero-tariff policy for the domestic sales of processed value-added goods in the Yangpu Bonded Port Area marks a major breakthrough in promoting free trade in China.
The central government has also introduced several policies to reinforce the status of Yangpu port. Firstly, a ship registration system with “China Yangpu Port” as the port of registry has been set up. Secondly, there are tax rebates for transport services using ships built in China and registered with China Yangpu Port that operate internationally or to Hong Kong, Macao and Taiwan.6 Thirdly, for container goods that have been declared at any of the 15 mainland ports and are leaving Chinese territory via Yangpu Port, tax will be rebated by the respective port upon departure.7 Fourthly, domestic ships using Yangpu Port as their transit port and engaging in domestic and foreign trade with the same ship are allowed to refuel with bonded oil or tax-exempted oil at Yangpu Port.8 Becoming a transit port for goods and a port of registration for ships are the features of a free trade port, so the above policies will enhance the appeal of Yangpu Port to businesses.
Industrial planning and development
The Yangpu Economic Development Zone has four main areas, focused on port logistics, petrochemicals, high-end manufacturing and residential (see the planning layout below). Both the port logistics and petrochemical areas are built along the coast facing Beibu Gulf where a container terminal and an oil terminal are located, with connections to the Yangpu Bonded Port Area and the petroleum refining and storage bases. The high-end manufacturing area is located north of the port logistics area to make it easy for enterprises to get hold of raw materials from the port and ship finished goods out of Yangpu by sea. The eastern living area is close to the main roads of the Zone so that Yangpu residents can conveniently travel to places such as Danzhou via the Yangpu Bridge.
Since 2020, Yangpu has been carrying out construction at high speed. According to Hainan Statistical Yearbook 2021, fixed-asset investment in the Yangpu Economic Development Zone grew 91.4% year-on-year in 2020; in 2021, a year‑on‑year growth of 109.8% was even recorded.9 The rapid growth in investment is due to the many enterprises setting up new plants in Yangpu. New industries entering Yangpu since 2020 include ethylene refining, drone manufacturing, jewellery processing, inflatable boat assembly and drug manufacturing. Some of these projects are jointly owned by mainland-funded enterprises and overseas companies incorporated in Hong Kong. To accelerate the development of high-tech industries in Yangpu and strengthen collaboration among industry, academic and research sectors, the Hainan provincial government and the Bielefeld University of Applied Science of Germany have signed an agreement to allow the latter to independently run a college in Yangpu. The new campus will focus on technological education and research as well as the incubation of technology start-ups. A petrochemical cluster and a high-end manufacturing cluster are rapidly taking shape in Yangpu.
In addition to the petrochemical and manufacturing industries, the port logistics industry is also developing rapidly. A lot of logistics companies are taking advantage of the policies in the Yangpu Bonded Port Area to develop business in bonded logistics and trading. Related businesses include cold-chain logistics, cross-border e-commerce and wine trading. Yangpu is also working to improve amenities for the community. By developing more educational and recreational facilities such as schools and libraries, the city is hoping to create a better living environment for people working there.
As the advantages of the Yangpu Economic Development Zone have become more apparent, policy support is advancing and amenities have undergone considerable improvement, Yangpu’s efforts to attract investment have been highly successful. By June 2021, 1,605 enterprises had registered in the Yangpu Bonded Port Area, of which 955 were registered in 202110, demonstrating the growing interest in setting up business in Yangpu. Although Yangpu’s throughput of foreign trade goods was down 7.1% year-on-year during the 2021 (but up 3.3% compared with the same period in 2019), the throughput of containers grew 29.3% year-on-year to 1.32 million TEUs.11 The container shipping business at Yangpu Port is now on track, and ready to expand the re-export of finished goods in the future.
According to the Outline of the 14th Five-Year Plan for National Economic and Social Development of Hainan and the Long-Range Objectives Through the Year 2035 and the 14th Five-Year Plan for the Development of Modern Logistics in Hainan Province (both in Chinese only), Hainan will seek to expand the applicable area for implementing the zero-tariff policy for processing value-added at the Yangpu Bonded Port Area. It will also accelerate the introduction of more shipping routes connecting Yangpu with overseas markets, and will attract more ships to use “China Yangpu Port” as the port of registry. Meanwhile, the government will continue to improve Yangpu’s logistic facilities, such as expanding Xiaochan Beach Terminal, rebuilding and expanding fairways in the port area, digitalising port operations and supervision, and improving cold-chain logistics facilities. In short, the government will strive to enhance the appeal of Yangpu Port to enterprises under the current policy framework. While consolidating the status of Yangpu as the logistics hub of Hainan ports, the government is also experimenting in-depth with the “first line, second line” model.
As mentioned above, industrial clusters in petrochemicals and high-end manufacturing are rapidly taking shape. Yangpu also intends to accelerate the development of the food processing industry. As the Yangpu Port is the only Customs-designated inspection site for meat and grain imports in Hainan, it intends to develop industries in high-end meats, functional food, vegetarian protein foods and healthy oils. So far, Yangpu has succeeded in bringing in projects in edible oil processing, grain storage and meat deep processing, and is also promoting itself as an international health food port.
Conclusion: Takeaways for Hong Kong Companies
According to the Provincial Government Work Report for 2021 (in Chinese only), Hainan will complete all preparations for independent customs operations before the end of 2024. By piloting the “first line, second line” management model, Yangpu Bonded Port Area will demonstrate to the government and the public how those new customs procedures will work in practice. If a company has already settled in before independent operations begin, it will be a bona fide participant in the customs experimentation. Companies based outside can get an in-depth idea of Hainan’s future investment environment by observing the development of the Yangpu Port.
Some might point to the potential competition between the Yangpu Port and Hong Kong. But the main function of the Hong Kong Port is to serve the Guangdong-Hong Kong-Macao Greater Bay Area (GBA). In 2020, the volume of cargoes that came from and headed to the nine mainland GBA cities accounted for 41% and 39% respectively of the throughput of the Hong Kong port12, and it is the deep economic hinterland of the GBA that gives the Hong Kong port a unique regional advantage. (See Hong Kong Logistics: Maritime Prospects and Trends) Thus, the relationship between Yangpu and Hong Kong is more of a co-operation than a competition.
For the development of Yangpu and the Hainan Free Trade Port as a whole a great deal of investment and a large labour force are necessary. Yangpu and the Hainan Free Trade Port will provide Hong Kong companies with countless development opportunities in export processing, business and trade services, logistics and shipping services as well as professional services. In recent years, as industries in western China have been developing rapidly, trade flows between Hong Kong and the mainland’s western region have increased correspondingly (See Hong Kong Logistics: Dual Circulation Supply Chains Assessed). By deepening trade relationships with western mainland regions and Belt and Road countries through Yangpu and the Hainan Free Trade Port, Hong Kong companies have a great deal to gain.
Yangpu International Investment Consulting Co., Ltd. (Chinese only)
1 For the planning of the Hainan Free Trade Port and the management model of “free flow through the first line, control at the second line”, see The Hainan Free Trade Port (1): Policy Update.
2 Administratively, the 20.08 sq km Lingao Jinpai Harbour Development Zone and the 39.38 sq km Dongfang Lingang Industrial Park form part of the Yangpu Economic Development Zone (totalling 174.24 sq km) for planning and investment promotion purposes. To underscore the regional advantages of Yangpu, however, this article focuses on the Yangpu district (which has an area of 114.78 sq km). For more information, visit the websites of Hainan Free Trade Port and Yangpu Economic Development Zone.
3 Source: Ministry of Transport
4 Source: Hainan Statistical Yearbook 2021
5 For details of this policy, see Circular of the Ministry of Finance, the General Administration of Customs and the State Taxation Administration on Hainan Free Trade Port’s “Zero-tariff” Policy for Raw and Auxiliary Materials (Cai Guan Shui No. 42 ), Circular of the Ministry of Finance, the General Administration of Customs and the State Taxation Administration on adjusting the Hainan Free Trade Port’s “Zero-tariff” Policy for Raw and Auxiliary Materials (Cai Guan Shui No. 49 , Chinese only), and The Hainan Free Trade Port (2): Multi-Sector Opportunities.
6 Circular on Value-added Tax Refund Policy for International Transport Ships of Hainan Free Trade Port (in Chinese only) (Cai Shui No. 41 )
7 Circular of the Ministry of Finance, the General Administration of Customs and the State Taxation Administration on the Trial Implementation of the Port of Departure Tax Rebate Policy (Cai Shui No. 1 )
8 Circular on the Policy of Hainan Free Trade Port on Refuelling Domestic Ships with Both Domestic and Foreign Trade Goods on Board with Bonded Oil and Locally Produced Fuel Oil (in Chinese only) (Cai Shui No. 2 )
9 Source: Hainan Provincial Bureau of Statistics
10 Source: Yangpu Economic Development Zone Administrative Committee
11 Source: Ministry of Transport
12 Source: Hong Kong Shipping Statistics (Fourth Quarter 2020), Census and Statistics Department, March 2021
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