The Chinese government has officially launched its largest free trade experiment by transforming Hainan Island into a special customs zone valued at US$113 billion, or approximately Rp1,760 trillion. This large-scale initiative is aimed at attracting foreign investment and challenging Hong Kong’s dominance as a global trading hub, amid economic pressure and strained relations with the United States.

On December 18, 2024, China formally separated Hainan’s customs operations from the mainland, marking the establishment of the Hainan Free Trade Port (Hainan FTP). Comparable in size to the U.S. state of Maryland, the island now operates as a distinct customs territory offering substantial tariff reductions and more relaxed business regulations.

This strategic move significantly expanded the share of goods eligible for duty-free entry, rising from 21 percent to 74 percent. In addition, the list of tariff-exempt products was broadened more than threefold to include over 6,600 categories of goods.

Under the new policy framework, products processed in Hainan may enter mainland China tariff-free provided their local value-added exceeds 30 percent. The plan also grants foreign entities broader access to service sectors previously restricted on the mainland and streamlines cross-border investment procedures.

The project is expected to accelerate supply chain integration and strengthen China’s economic ties with Southeast Asian countries located directly south of the island.

China’s Vice Premier He Lifeng described the port as a critical gateway that could usher in a new era of openness between China and the global economy.

The launch of the Hainan FTP was welcomed by financial markets, with stocks in China and Hong Kong posting gains on Monday amid signs of fresh capital inflows. Analysts view Hainan as a low-risk testing ground for China’s transition toward a higher level of economic liberalization.

Nevertheless, Xu Tianchen, a senior economist at the Economist Intelligence Unit, noted that while the Hainan model offers managed liberalization beneficial for reintegrating supply chains, it lacks the robust legal framework and financial openness that distinguish Hong Kong.