China unveiled a detailed plan to establish the country's southern province of Hainan as a pilot free trade zone (FTZ) in mid-October, generating new opportunities for the island to achieve further development. Despite unique advantages due to its geographical location, resources and ecological environment, Hainan still confronts several challenges in translating its potential into competitiveness and developing into a high-level pilot FTZ.

An optimized business environment can help Hainan evolve from a pilot FTZ to a free trade port. But prominent problems, mainly caused by the sluggish market and low-efficient administrative sectors, still surround the local business environment, a major concern for investors at home and abroad.

At present, Hainan needs to boost the local market so that it can play a decisive role in allocating resources. The key to fully augmenting the market in Hainan lies in further opening the service industry. To develop into one of the leading open service markets in China, Hainan needs to take the lead in launching free trade policies in the areas of tourism, shopping, healthcare, culture and entertainment, education, and shipping in line with its local conditions to produce multi-pronged effects. The move will propel Hainan's free trade port development and become a trailblazer in the modern service industry.

Another priority task is to improve the efficiency of the local government. The Hainan Provincial Government's ranking declined from 29 to 31 on the administrative efficiency list among 31 provincial-level governments in the country in the period from 2011 to 2016. The local government needs to cut redundant items and allow enterprises to operate more independently. A feasible policy option is to establish specialized courts to provide legal protection for hi-tech industries focusing on the digital economy.

Despite sound environmental conditions, the added value brought by the agricultural industry in Hainan is still low due to the inadequate processing of agricultural products. In addition, local land resources need to be further exploited to maximize profits. In view of these problems, the local government needs to further release the potential of local resources. It should eliminate the urban-rural division in the household registration system so that personnel can flow more freely between urban and rural areas. Urban-rural disparities in the market for land for construction should be abolished to enable rural residents to obtain stable property income.

Tangible progress should also be made to build Hainan into an internationally influential tourism and consumption center, since an insufficient supply of products and services of international standards is hindering Hainan's development amid the rising demands for service-oriented consumption in China. According to a survey conducted by Hainan's tourism authorities, the average daily spending of domestic visitors to Hainan was 815 yuan ($118) in the third quarter of 2018, of which the basic consumption of transportation, accommodations and food accounted for 69.27 percent. Expenditures on shopping, entertainment and other services represented only 21.68 percent.

To boost tourism, Hainan needs to foster new growth poles. It should improve duty-free consumption policies by granting more companies the right to operate duty-free stores and remove constrains on the types of consumer goods allowed. The local government can also focus on opening up the healthcare market by making imported drugs and medical facilities more accessible, taking the lead in exempting value-added tax on imported drugs and expanding the coverage of preferential policies for healthcare-related tourism.

Cooperation with Hong Kong is essential. The two regions can jointly create an industrial and consumption chain for duty-free products and launch better service management standards and market supervision regulations.

Top-notch talent is also a key driving force. To attract competent professionals, the local government needs to focus on supporting innovation. Since the transformation from a pilot FTZ to a free trade port can help Hainan attract more talent, multiple platforms should be established to create opportunities for them to innovate and start businesses.

Hainan should encourage universities, research institutes and enterprises to make technological innovations by offering incentives and preferential policies. The overall educational level in Hainan also needs to be enhanced by introducing prestigious colleges at home and abroad to run certain new campuses of local universities.

This is an edited excerpt of an article by Chi Fulin, Dean of China (Hainan) Reform and Development Research Institute, published in Economic Information Daily

Copyedited by Rebeca Toledo

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