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Hainan’s ASEAN Future And Dark Clouds Over Hong Kong – Analysis

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The Hainan Free Trade Port plan is aligned with China’s new Silk Road initiatives, the Greater Bay Area plan and deeper ties with Southeast Asia. Hong Kong’s real threats are closer and farther.

On June 1, the Chinese government published its Hainan masterplan. It seeks to transform the southernmost province, separated from Guangdong’s Peninsula by the Qiongzhou Strait, into a Free Trade Port (FTP). The plan will turn China’s largest and most populous island to its biggest special economic zone (SEZ). 

The initiative stems from the early days of Chinese economic reforms. Following the first special economic zones in Guangdong and the opening of further 14 coastal megacities to overseas investment, the government disclosed its plan to transform Hainan into China’s largest SEZ in 1988. 

In the West, Hainan’s long-term plan has been seen as a reaction to recent turmoil in Hong Kong and the Trump administration’s controversial trade war against China. 

In reality, Hong Kong’s real threats are elsewhere.

Vital link to ASEAN and 21st Century

In Hainan, things began to change in 2009, when the Chinese government began to transform the island into an international tourist destination by the early 2020s. As investment inflows intensified, particularly in real estate, another surge ensued in the early 2010s, when Hainan came to be seen as a frontline to Southeast Asia, and as a vital node in the Maritime Silk Road along the Belt and Road Initiatives.

Due to new protectionism in the West, that role has steadily increased in importance. In early 2020, the rising bilateral trade with ASEAN accounted for 15% of China’s total trade volume, relative to 11% and 14% with the US and EU, respectively.

With its proximity to Southeast Asia, Hainan possesses unique advantages as a future free trade port. With more than 9 million people, it is a fourth more populous than Hong Kong and almost twice as big as Singapore. And by land area – 35,000 km2 – it is more than 30 times the size of Hong Kong (and nearly 50 times larger than Singapore). That’s vital for an international trade hub.

According to the four-stage timeline, Hainan should become an operational free trade zone during this year. In 2020-25, Hainan’s free trade port should be in place, with an attractive business environment, improved industrial competitiveness, sound rule and law. In 2025-35, the FTP is expected to mature operationally. And by 2050, Hainan should have established, strong international influence. 

The Hainan masterplan seeks to liberalize cross-border flows of trade, investment and capital, and people, transport and data. But its current positioning and industry focus are different from Hong Kong. 

Hainan will play more of a complementary role – not a competitive rivalry – to Hong Kong.

Dark clouds over Hong Kong’s future

Under the 1992 “US-Hong Kong Special Policy Act” and after the 1997 handover of Hong Kong from Britain to China, Washington has treated the city separately from the mainland in matters of trade exports and economic control. 

In the past two decades, there have been periodic attempts by mainly localist and separatist groups in Hong Kong to undermine the status quo. In the West, they are seen as “pro-democracy” groups, whereas China sees them as destabilizing forces, due to their close cooperation with regime-change forces in the US and UK.

These efforts intensified in summer 2019, which saw a violent protest escalation that undermined Hong Kong’s recovery, pushed it to recession even before the pandemic and has contributed to the city’s current, first-ever back-to-back recession. 

At the same time, cooperation between some protest leaders and US Congress led to an amendment in the 1992 Act. The 2019 “Hong Kong Human Rights and Democracy Act” allows US government to impose sanctions against Chinese and Hong Kong officials and requires US agencies to conduct an annual review to determine whether changes in the US-Hong Kong trade relations are warranted. 

In Beijing’s view, such a law would be comparable to a Chinese Act that would allow China to conduct reviews and impose sanctions against US government, state and municipal officials depending on, say, the dire state of race relations in America.

Nonetheless, in late May, US Secretary of State Mike Pompeo certified to Congress that Hong Kong no longer enjoys a high degree of autonomy from China. Days later, President Trump announced some sanctions would be placed on Hong Kong. 

With these statements, the White House has paved a potential way to bad business, diplomacy, precedent and still another major policy mistake.  

How 2019 Act would undermine American multinationals and Hong Kong

Today, there are some 85,000 US citizens in Hong Kong, which hosts 1,300 US companies with Asian headquarters in the city. If the new 2019 Act is implemented, they could leave for Singapore or elsewhere, which would penalize their cost structure, or relocate to China, which would undermine the White House’s objectives. In both cases, US would lose its bilateral goods and service trade surplus of $34 billion with Hong Kong, which would cost still more US domestic jobs. 

The long-term diplomatic impact could be worse. For decades, US presence in Hong Kong has been a major influence channel in East Asia, while US multinationals’ HQs in Hong Kong and their subsidiaries in China have served as vital instruments of increasing bilateral understanding. Yet, the Trump White House seems intent to undermine both.

Since the 2019 Act could derail Hong Kong’s economic and political future, it represents everything but the best interests of the city. That’s perhaps why some leading Hong Kong protesters have recently, but only belatedly, warned about the consequences of the Act that they themselves had made possible. 

The Trump White House’s policy mistake could also trigger a process in which Shanghai, thanks to its Free Trade Zone and Lingang New Area, could receive many new US companies, particularly financial giants, that the 2019 Act would force to leave Hong Kong. Since 2009, Shanghai has been transformed into the mainland’s global financial and trade hub. Those steps would certainly be accelerated. 

And thanks to the Greater Bay Area initiative – China’s huge Silicon Valley-like region that links Guangdong’s megacities, Hong Kong and Macau – US technology giants could flock to Shenzhen and elsewhere, while those that operate in Southeast Asia or have significant shipping interests could move to Hainan. 

The greatest threat to Hong Kong

Hong Kong’s greatest threat has never been the myth that China would want to turn it into “just another Chinese city.” That’s precisely the one thing China does not want. 

Instead, Hong Kong’s greatest risk is irrelevance. If its greatest strengths are undermined, it could become inconsequential as a major global economic hub.

Indeed, if the White House prevents the city from realizing its unique advantages – world-class finance, shipping and trade – Hong Kong would face accelerated decay in the future.

Hainan’s free port is not Hong Kong’s threat. The city’s real risks are closer and farther.

Dan Steinbock

Dan Steinbock

Dr Dan Steinbock is an recognized expert of the multipolar world. He focuses on international business, international relations, investment and risk among the leading advanced and large emerging economies. He is a Senior ASLA-Fulbright Scholar (New York University and Columbia Business School). Dr Dan Steinbock is an internationally recognized expert of the multipolar world. He focuses on international business, international relations, investment and risk among the major advanced economies (G7) and large emerging economies (BRICS and beyond). Altogether, he monitors 40 major world economies and 12 strategic nations. In addition to his advisory activities, he is affiliated with India China and America Institute (USA), Shanghai Institutes for International Studies (China) and EU Center (Singapore). As a Fulbright scholar, he also cooperates with NYU, Columbia University and Harvard Business School. He has consulted for international organizations, government agencies, financial institutions, MNCs, industry associations, chambers of commerce, and NGOs. He serves on media advisory boards (Fortune, Bloomberg BusinessWeek, McKinsey).

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