Why Hainan should be on your company’s radar in 2023

Renowned for its golden sandy beaches and tropical climate, today, the “Hawaii of China” is generating headlines for its business-friendly environment – and some of the world’s biggest companies are taking note 

Hainan’s location in the warm waters of the South China Sea have long made it a haven for fishing and agriculture and, in more recent years, tourism, but in the early 2020s, a series of beneficial import and trade policies began to put it on the radar of companies looking to grow their business in China.

In this article, we review some of the main reasons why Hainan has become such a hotspot and why consumer companies in particular should be thinking seriously about their footprint in the province.

CBBC and our expert panelists will also discuss the Hainan opportunity in more detail during day one of CBBC’s China Consumer conference 2023 on 4 July.

Hainan in a nutshell

Hainan is the smallest and most southern province in China. Made up of many small islands in the South China Sea, the largest, Hainan Island itself, accounts for 97% of the landmass. The province has 10 major cities and 10 counties, of which Haikou and Sanya are the largest.

Hainan’s economy was traditionally dominated by primary industry, with fishing and tropical cash crops (e.g., rubber, coconuts, palm oil, and fruit) contributing significantly to provincial GDP, but the tertiary sector has developed rapidly in recent years, accounting for 61.5% of the economy in 2021. The province has a history of economic liberalisation, especially during the Deng Xiaoping era, and has been a special economic zone (SEZ) since 1988.

Incentives to invest and manufacture in Hainan abound

The Chinese government released the Overall Plan for the Construction of the Hainan Free Trade Port (FTP) in June 2020, with the aim of liberalising investment procedures, reducing tariffs across a range of products and industries and improving customs clearance procedures.

As Dezan Shira’s China Briefing explains, the goal of Hainan’s FTP policies is to set up a “first line” to overseas countries and regions and a “second line” to the Chinese mainland. In regards to the “first line”, goods, except those on List of Goods and Articles Prohibited or Restricted from Import and Export at Hainan FTP, can be freely imported and exported between overseas regions and Hainan FTP under customs’ special supervision. The “second line” will be more tightly controlled – goods entering the Chinese mainland from Hainan will go through procedures in accordance with relevant import regulations, customs duties and taxes.

Enterprises registered in the Hainan FTP can also enjoy three major corporate tax relaxations:

• Corporate income tax at a reduced tax rate of 15%
• Income from new overseas direct investment derived by enterprises in the tourism, modern services and high-tech industries may be exempted from CIT
• Eligible capital expenditures can be allowed one-off pre-tax deductions or accelerated depreciation and amortisation.

Hainan has one of the world’s most generous duty-free policies — and consumers are taking advantage of it

Foreign and domestic travellers departing from Hainan (but not China) have a duty-free shopping allowance of RMB 100,000 (£11,458) on product categories such as cosmetics, luxury goods, alcohol and even electronics (when purchased from dedicated duty-free stores). With average savings on prices in the rest of China at around 15-35%, there is a strong incentive for consumers to make Hainan their main shopping destination, even with China’s borders back open.

During the seven-day Spring Festival holiday period in early 2023, the Hainan Department of Commerce reported that online and offline duty free sales reached RMB 2.572 billion (£294.7 million), a 329% increase on pre-pandemic levels.

Hainan is also home to the world’s largest duty-free mall, which opened in Haikou, the provincial capital, on Friday, 28 October 2022. Owned by China Duty Free Group, the 3,000,000-square-foot cdf Haikou International Duty Free City is home to more than 800 international and Chinese luxury brands.

“Consumers are entering a new era of duty-free shopping,” says Rocky Chi, head of planning at leading Chinese marketing consultancy and full service agency, Emerging Communications. “The Chinese government will continue to push for duty-free shopping, and as for consumers, they are spoiled for choice by such an easy way of shopping.” Indeed, the Chinese government plans to make the whole island duty free by 2025.

For UK brands looking to the Hainan market over the next couple of years, a key consideration will be levels of market saturation, something that has already become an issue for the skincare and cosmetics segments. Brands are advised to move away from price-based competition (a strategy that drove strong sales during the pandemic) and focus on branding and differentiation by, for example, introducing new packaging styles or product lines exclusively for the Hainan market or creating co-branded campaigns with local hotels or attractions.

Now is also the time to experiment with digital tools and phygital retail, something that Chinese consumers have so far proven more receptive to that Western consumers. James Herbert, managing director of Hylink UK, emphasises that “interactive digital events, gaming, social commerce and non-fungible tokens (NFTs) are evolving trends that all brands need to be aware of.”

Even with borders open, Chinese tourists are still choosing to holiday in Hainan

During the recent May Day holiday period, 3.2 million domestic tourists visited Hainan, an increase of 55% on 2019, the last year prior to Covid. Perhaps more notably, spending by visitors to Hainan was up 80% compared to 2019. 

While there can be no doubt that there is a huge appetite for international travel among Chinese consumers now that Covid restrictions have been lifted – a recent report from Gusto Luxe and Global Blue found that 92% of travellers were planning an overseas trip in 2023 – the May Day holiday numbers demonstrate that Hainan has established a strong foothold as a domestic travel destination. In addition to the aforementioned duty free policies, the islands’s popularity has been driven by the availability of increasingly good-quality hotels (Hainan is home to 94 international brand hotels and 78 well-known hotel management firms), which offer services targeted at domestic Chinese tourists, and, crucially, savvy marketing via Chinese digital platforms like Douyin and Trip.com.

For UK brands, this demonstrates the importance of adapting not just marketing strategies but service offerings to meet the needs of Chinese consumers.

China Consumer 2023

This article was produced as part of a series for China Consumer 2023.

Learn more about CBBC’s flagship consumer event of 2023 here.