Hainan is the latest Chinese free-trade zone with tech hub ambitions

Hainan, an island province known as China’s Hawaii, does not only want to be known for sunshine and beaches: It has set an ambitious goal to become the country’s southern hub for technological innovation.

The strategy involves offering tech start-ups free rent, reduced tax rates, easier visa policies, and access to government-backed venture capital funding.

The first global tech company to commit to a presence on the island was Microsoft, which signed an MOU with the provincial government in April 2013 for a partnership that would transform Hainan into an “international tourism destination and a powerhouse of software development”. Singaporean private equity giant Temasek, which has invested in Tencent and Alibaba, signed an MOU with Hainan-based HNA Group in April last year to explore opportunities in aviation and logistics, and airport infrastructure.

The Hainan government said it is in talks with other tech multinationals, including IBM and SAP, to establish Asia region headquarters on the island.

“Compared with Beijing and Shanghai, Hainan has a geographical advantage that can connect China with Southeast Asia,” said an official from the Hainan government, who declined to be named because of internal policy. “It would be attractive for multinationals and domestic giants to set up regional headquarters here.”

Hainan must overtake Hong Kong on international trade, Jack Ma says

Hainan island, already global headquarters for Chinese airline and property conglomerate HNA Group, was designated as China’s 12th free-trade zone by Chinese President Xi Jinping in April last year, which in theory means the country’s southernmost province can grant foreign firms greater trade and economic freedom. China’s other free trade zones are in Shanghai, Fujian, Tianjin and Guangdong.

China’s State Council said the Hainan FTZ would be operational by 2020 and reach a “mature” stage by 2035, with industries such as tourism, medical care, aviation and new energy given preferential treatment in terms of relaxed restrictions on foreign capital movements and hiring of overseas talent.

Hainan authorities have also set up a special fund for internet development, earmarking 500 million yuan (US$63.7 million) per year for promising tech start-ups. In 2017 a total of 269 companies received money from the fund, including Chinese telecoms giant ZTE, Microsoft and Tianya, a popular forum website founded in 1999. While ZTE and Microsoft are not exactly start-ups, they are major global tech players that bring cachet to any technology hub, especially one on a tropical island.

On Monday the Hainan government hosted some of China’s most successful tech leaders, including Albaba’s Jack Ma, Tencent’s Pony Ma Huateng, and Ctrip's James Liang Jianzhang, who offered advice as part of a government-entrepreneur consulting conference held on the island.

Ma said Hainan should look to the Hong Kong model of a free trade port but update it for the 21st century. “To build a digital free trade port and to explore new trade rules in the digital age will be the key for Hainan,” Ma said.

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To be sure, Hainan has some tough competition. As a fledgling tech hub it would be competing against established centres like Shenzhen, a major electronics manufacturing base and headquarters to Tencent, DJI, Huawei and ZTE, as well as Hangzhou where internet giants Alibaba and NetEase are based. Further north, the Zhongguancun district of Beijing is home to nearly 9,000 tech firms, including Nasdaq-listed Baidu and Sina Corp, while the capital is also home to the country’s top universities like Tsinghua and Peking University.

While FTZ status may look good on paper, Chinese regulators have not fully loosened capital controls in these zones despite much hype around the Shanghai free-trade zone which was rolled out as a national show piece in 2014, and visited by Xi in May that year. To date, the yuan has yet to become fully convertible in the Shanghai free-trade zone, failing to meet investor expectations.

“Chinese financial regulators are recently very cautious in easing restrictions nationwide,” said Chen Bo, economics professor at the Huazhong University of Science and Technology, and an adviser to several free trade zones in China. “Amid an economic slowdown coupled with tensions with the US, there will be more pressure on capital outflow.”

Moreover, foreign investors including venture capital and private equity funds still need to go through several complicated steps to operate in Hainan – including registration with the State Administration for Industry and Commerce, filing relevant documents to the national Ministry of Commerce, and filing to the state administration of foreign exchange.

China re-energises Shanghai free-trade zone’s flagging fortunes

Compared with Shanghai and other free-trade zones in China, Hainan’s weaknesses are obvious as it has a less developed economy, Chen points out. In 2016, Hainan’s GDP per capita was around 60,000 yuan, only 30 per cent of Shanghai’s for the same period.

Hainan was originally an agricultural-based economy which transitioned to tourism in the 1990s. However the island’s appeal among international tourists is still low compared with Indonesia’s Bali and Thailand’s Phuket.

Yet Hainan’s weaknesses in trying to attract tech industries may also be seen as a strength. “Hainan is like a sheet of blank paper – undeveloped but easy to make some changes,” said Chen. “It is also an offshore island, so the trial-and-error costs are much lower for the policymakers compared with inland regions.”

Another key piece of the start-up puzzle is access to talent. While Hainan introduced a visa free policy in May 2018, allowing visitors from 59 countries – including the US, the UK, France, Germany, and Japan to stay for up to 30 days – a tech hub it needs more engineers, not beachgoers.

So the red tape previously involved in getting a working visa has been streamlined for professionals. “If you’re a foreigner without a bachelor’s degree and you want to start up something in China, it’s almost impossible for you to get a working visa in big cities like Beijing, but it’s possible to get one in Hainan,” said William Bao Bean, a general partner at SOSV.

Despite its drawbacks as a tech hub, Hainan's efforts to spur regional growth by embracing blockchain technology paid off when Beijing-based Huobi Group, one of the world’s biggest cryptocurrency exchanges, moved its operation centre to the island's blockchain pilot zone. Huobi purchased three buildings in the Hainan Ecological Software Park which already hosts 175 enterprises, including the Microsoft Technology Centre, China-based cloud computing service provider ChinaSoft and US information technology firm Hewlett-Packard Enterprise.

Huobi is in the process of relocating about 300 of its 900 mainland-based staffers – including some senior executives – from Beijing to Hainan, said Livio Weng Xiaoqi, CEO of Huobi Global, the company's main exchange business.

The local government granted it tax benefits and allowed Huobi employees to apply for “honorary citizen” status which allows them to buy properties and cars in the province.

“If China is to make some breakthroughs in the blockchain industry, it is mostly likely to happen in two places: Hong Kong or Hainan. We have made plans in both places because we don’t want to miss the opportunity,” Weng said.

As another incentive for start-ups, the Hainan government is working with private real estate developers to provide free rent for qualified companies.

“In those first few years expenses [for start-ups] can be very high, especially when you have your whole operation in Beijing and Shanghai where the cost of living is so expensive,” said Sean O’ Sullivan, founder and managing partner at SOSV, a global venture capital and accelerator firm.

“Beijing and Shanghai are attractive because they are financial marketplaces for lots of venture capital funds, but that doesn't mean you have to have all of your operations there,” added Sullivan, who oversees accelerator programs across the US, Europe, and Asia.

Two companies in SOSV’s accelerator programme – online ticketing platform 247tickets and ExpoPromoter, which uses machine learning to find buyers for international trade shows, have set up offices in Hainan. The accelerator’s focus in Hainan is on technology to improve tourism, entertainment and cultural industries, according to SOSV.

Additional reporting by Zheping Huang

This article Hainan is the latest Chinese free-trade zone with tech hub ambitions first appeared on South China Morning Post

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