Hainan’s new duty-free zone is booming. The island’s shopping spree presents both challenges and opportunities for Macau. The two regions can boost cooperation on tourism, education and technology
To be or not to be: this had been a question clouding the development of the Chinese southernmost province Hainan for years in regard to casino gambling. However, since the central government has proposed to set up a free trade zone on the vacation destination in 2018 and a free trade port in 2020 — alongside the repeated denials from the central and provincial officials — the hopes of Hainan turning into a gambling enclave have been dashed.
Although this has freed Macau from the competition as the only place on the Chinese soil that casino gambling is legalised, Hainan has emerged as a potential rival to Macau in other fronts in recent years, namely shopping tourism for Mainland Chinese.
The island, envisaged as the “Hawaii of China”, has been increasingly popular as a getaway for the mainlanders since the onset of the Covid-19 pandemic last year, when travel restrictions have prevented most of them from venturing beyond the border. With fashion houses and luxury brands like Louis Vuitton, Gucci and Cartier running brick-and-mortar stores across the island, which introduced offshore duty-free shopping policies in 2011, it has become a powerful magnet for the mainland shoppers.
Data from the provincial authorities show Hainan raked in RMB32.74 billion (US$5.09 billion) in duty-free sales in 2020, surging 127 per cent year-on-year and accounting for over 16 per cent of the total retail sales on the island. In the recent Labour Day holiday in the mainland, covering the period of 1-5 May, the sales recorded by all nine duty-free shops in Hainan skyrocketed 248 per cent year-on-year to RMB 993 million. Over 121,000 people shopped for 1.35 million pieces of duty-free goods in the five-day holiday, representing a hike of 141 per cent and 229 per cent respectively from the previous year.
The craze has been supported by the central government’s efforts of turning the island — equivalent to the geographical size of Taiwan with a population of 9 million — into an international tourism and duty-free shopping hub since the proposals of the free trade zone in 2018 and the free trade port in 2020. For instance, Beijing has approved a new duty-free spending cap for the mainlanders in Hainan from RMB30,000 a year to RMB100,000 a year since July 2020. Shopping restraints have been significantly minimised on the island, for example, the limit of cosmetics products the mainlanders could buy has been raised from 12 to 30, and more varieties of products have also been available.
International consultancy KPMG China and business-to-business publisher, The Moodie Davitt Report, issued a travel retail white paper on the southernmost province this May, indicating the island ‘could become the world’s biggest duty-free market in the near term’ and replace South Korea should its current growth curve be maintained. The “Travel Retail Market in Hainan FTP – Towards A Golden Future” report indicates the duty-free sales on the Chinese Hawaii could triple to USD15.5 billion by 2022 and balloon to USD46.5 billion by 2025.
Bernstein Research also has an optimistic view towards the prospect of Hainan, forecasting its duty-free sales could expand sevenfold by 2030 from now. While beauty and cosmetics products make up nearly half of all duty free sales in Hainan, luxury goods only account for about one-third of sales, the brokerage noted in a recent report, adding the latter segment has developed rapidly though with the number of luxury brands in Hainan growing 80 per cent in the past six years.
“One of the most debated topics about Hainan is duty-free shopping and we were impressed about what is happening there now,” says Macau businessman Kevin Ho King Lun, who visited the island in May in a five-day official excursion with other Macau deputies to the National People’s Congress (NPC). “Basically, most well-known brands of luxury goods could be found in Hainan.”
“Hainan definitely imposes challenges for Macau in this area, for example, the cap for goods exempt from duties the mainlanders could carry back from Macau to the mainland is only RMB5,000 [each trip], compared with the duty-free cap of RMB100,000 [a year] in Hainan,” says Mr Ho, who is also a deputy of China’s top-level Parliament. While Macau does not impose taxes for the sales of most products in contrast to the mainland, the customs might intercept the mainland travellers when they are returning home should they carry goods worth over the ceiling of RMB5,000.
“That’s why we [NPC deputies of Macau] have proposed during the annual meeting this year [held in March] the cap for Macau should be enhanced in accordance with the standards applied to Hainan,” he says.
While the duty-free sales have retained the upward momentum in the past two years in the Chinese southernmost island, the same story could not be said for Macau amid the pandemic. The latest official data show the retail sales in the city totalled MOP45.19 billion (RMB36.23 billion/US$5.65 billion) in 2020, down by 41.5 per cent from the previous year, albeit a smaller drop of 12.5 per cent in the fourth quarter. The result was only slightly more than the duty-free sales of RMB32.74 billion reported by Hainan last year.
Hardware and software
However, the NPC deputy believes Macau still has its edges over what he describes as “China’s Phuket or Bali” in terms of attracting mainland and international travellers. “The two places are quite different: Hainan boasts abundant natural resources and stunning sceneries, while Macau has the gaming industry, and more developed ancillary facilities for entertainment and tourism,” Mr Ho illustrates. “As tourism in the city is well developed, people have more confidence in shopping and dining here.”
“My experience [for my five-day trip] in Hainan is that its tourism hardware is excellent, but there is still room for improvement in software,” he continues. “The hardware could be quickly developed with capital investments, but the advancement of software requires time and accumulation of experiences.”
According to the master plan for the development of the free trade port of Hainan published by the central government last year, the free trade port system for the island would be “basically established” by 2025 and “more developed” by 2035. One of the highlights of the plan is that the island will be “sealed off”, meaning the entire province will enjoy separate and independent customs’ jurisdictions from the rest of Mainland China for the implementation of a zero-tariff policy for trade and for further opening up.
Apart from stressing the development of tourism, including duty-free retail, the master plan also observes that the island should nurture modern service segments like finance and healthcare, hi-tech industries like astronautics, and exploration of natural resources.
From the perspective of Lao Ngai Leong, Macau and Hainan could complement each other rather than compete. “Since the news of the establishment of the free trade port in Hainan, many people have wondered whether this means Hainan will become a rival to Hong Kong and Macau,” says the veteran Macau entrepreneur, who is also a NPC deputy. “But the fact is Hong Kong and Macau should actively participate in… the development of the free trade port in Hainan to create synergy.”
For instance, there could be regular flights between Macau and the Chinese Hawaii, which are only one hour’s flight away. “Macau could collaborate with Hainan to develop more in-depth tourism and vacation products given the limited geographical size of the city,” Mr Lao adds. “The establishment of a flight connection between the two places could unlock this huge potential.”
“Before the pandemic there were only chartered flights between the two places in particular seasons rather than regular scheduled flights,” Mr Lao advises. “Macau now has a visa-free policy for travellers from over 80 countries and regions while transit visitors could also enter the city sans a visa in 48 hours. On the other hand, Hainan waives visas for travellers from 59 countries. Should there be regular flights between Macau and Hainan… these could help attract overseas visitors.”
He also suggests there could be more exchanges between the two sides at the government level to share experiences. “In order for Macau to achieve appropriate economic diversifications and explore new development opportunities, the city has to be integrated with the nation’s development,” he adds.
The two places have indeed had more exchanges at top level in recent times. Besides the official visit to Hainan by the NPC deputies of Macau in May, where they also met the top officials of the province, Macau Chief Executive Ho Iat Seng also held a meeting with Shen Xiaoming, party chief of Hainan, in April. Mr Ho pointed out in the meeting held on the sidelines of 2021 Boao Forum for Asia in the Chinese province that both sides have “huge room for cooperation” in education, technology, tourism and other fields, while Mr Shen highlighted the two places share similar industrial structures and could work hand-in-hand for more tourism products at both the government and civic levels.
Lin Zhijun, vice-president of the Macau University of Science and Technology (MUST), acknowledges Hainan might attract some mainlanders from Macau with the development of duty-free shopping. “This means Macau should further develop its tourism industry, improve its service quality and upgrade its offerings to stay competitive,” the business scholar has recently remarked in an article. “The city could also better play its role as the link between the mainland and the international tourism markets.”
The academic highlights the development of Hainan represents both challenges and opportunities for the city. “The purpose for the central government to develop Hainan as a free trade port is not to replace any other cities… but to further link the Chinese economy to the global economy,” he says. “The nation has different economic strategic plans for different regions… which should complement but not replace each other.”
Riding on the free trade port frenzy, Hainan reported a growth of 19.8 per cent year-on-year in gross domestic product (GDP) in the first quarter of 2021, and the two-year average increase of 7 per cent in GDP placed the island as the fastest growing Chinese province. But the Chinese Hawaii still ranked at the last fourth place among other provinces in terms of the size of the economy.
For Kevin Ho, the NPC deputy, he waits to see how the current wave of development in Hainan will take shape. “During this trip [in May] I have also seen a number of unfinished real estate projects in Hainan, reminding me of the real estate bubble there between the late 1980’s and the early 1990’s,” he illustrates, referring to the sevenfold increase of property prices in the southernmost province in only a few years after it became a standalone province from nearby Guangdong in 1988. But the bubble burst at last in the 1992-93 period with the government intervention to rein in the prices.
Hainan had then stayed under the radar until 2011 with the introduction of duty-free shopping policies. “But the fervour had only been sustained for a short time until the third wave of development we’re witnessing now,” Mr Ho says. “It waits to see how [the authorities] have accumulated experiences from the last two attempts.”
“The duty-free sales in Hainan are red hot at the moment but could this continue after Mainland Chinese will travel abroad again in the aftermath of the pandemic,” he says, adding the Chinese province still has much room for improvement in which the city could also help. “As Macau is well-versed in providing training for the tourism and services industry, it could surely help Hainan to improve its software.”