Since 1978, China’s reform and opening-up has served the country very well. Significant progress has been made in all dimensions, especially in economic development. For decades, China has experimented with special economic zones offering tax incentives, streamlined customs, and sector-specific policies. On Dec 18, 2025, Hainan province’s islandwide separate customs regime came into effect — precisely 47 years after the third plenary session of the 11th Central Committee of the Communist Party of China that launched Deng Xiaoping’s reform and opening-up. This was not a coincidence. The timing was a deliberate signal, and Hainan represents something different.

The most immediate and concrete opportunity lies in processing trade. By extending zero-tariff treatment to approximately 6,600 categories of goods — about 74 percent of taxable imports, up from 1,900 categories — Hainan enables the large-scale duty-free import of inputs, local processing or assembly, and “re-exports” into the mainland market once value-added thresholds are met. This “import, process, and re-export” model fundamentally reshapes supply-chain economics. For many companies, especially in food processing, consumer goods, medical devices, and selected industrial products, Hainan can function as a cost-effective processing base rather than merely a logistics transit point.

Tourism and retail will likely move even faster. Hainan is already well known domestically as a leisure destination. The free trade port framework accelerates its transformation into a major international tourism and consumption center, attracting Chinese consumers who increasingly prefer to shop, travel, and consume services at home rather than abroad. Duty-free retail, hospitality, healthcare services, and lifestyle offerings are expected to expand rapidly, creating immediate demand for operators, service providers, and management talent.

In parallel, the 15 percent corporate and personal income tax rate — benchmarked deliberately against Hong Kong and Singapore — signals an intent to compete on institutional quality rather than cost alone. Differentiated rules in healthcare, education, internet access, and cross-border capital flows further distinguish Hainan. Most notably, firewall-free global internet access for approved entities creates conditions unprecedented elsewhere on the mainland, enabling data-intensive research-and-development collaboration, and cross-border digital services that support the formation of specialized R&D clusters linked to both domestic and international innovation networks.

Education represents another strategic dimension. The opening-up to foreign universities will create a human capital hub with clusters of well-regarded international institutions. This addresses a critical bottleneck: the talent pipeline necessary to support advanced manufacturing, R&D, and professional services. As these educational clusters mature, they will attract complementary activities — corporate R&D centers and knowledge-intensive services.

Technology manufacturing and supply-chain operations will follow naturally. The zero-tariff regime will attract operations between pure trading and full-scale production. As industrial and digital activities expand, professional services — finance, legal, accounting, and compliance — will naturally follow, reinforcing a more complete economic ecosystem.

There are, of course, also challenges. Hainan has made several attempts to establish special economic zones before, but those efforts were not particularly successful. In the late 1980s and early 1990s, Hainan was designated as a special economic zone, yet it failed to match the transformational impact seen in Shenzhen or Shanghai’s Pudong district. Real estate speculation distorted development priorities, and institutional frameworks proved inadequate to attract serious long-term investment.

Why should this time be different?

Several factors have shifted. China’s domestic consumption market is now large enough that Hainan can no longer be treated as a marginal island economy. It sits within short logistical reach of major southern consumption and manufacturing hubs and is explicitly designed to channel offshore goods and services into the mainland through a two-tier customs system. At the same time, rising geopolitical frictions and supply-chain reconfiguration have increased demand for jurisdictions that combine mainland market access with clearer, rule-based operating conditions. Hainan has responded to this by institutionalizing openness rather than relying on ad hoc incentives: Most imported goods enter the island tariff-free; processed goods can access the mainland once defined value-added thresholds are met; and firms operate under a unified rulebook covering customs clearance, services access, data use, and capital flows. As a result, the current framework is materially more comprehensive than earlier free-trade zones, shifting the value proposition from short-term cost advantages to longer-term regulatory predictability.

However, while Hainan is an excellent destination for tourism and travel, the island still feels quite parochial compared with major mainland cities or international hubs. Infrastructure has been improving but needs further development to support a sophisticated economy.

The success of Hainan depends critically on whether local and provincial authorities can sustain the disciplined and transparent application of rules needed to attract long-term investment. This is not primarily about physical infrastructure, which China builds with impressive scale and speed. It’s about institutional credibility maintained over extended periods.

Why Now?

The timing of Hainan Free Trade Port’s setup reflects important shifts that necessitate a new approach to opening-up.

Externally, the intensification of geopolitical competition and supply-chain reconfiguration has elevated the importance of jurisdictions that offer predictability and institutional stability. Hainan Free Trade Port addresses these concerns by providing an environment with greater regulatory transparency and a more-lenient regulatory regime.

Domestically, the persistent gap between robust external trade and weak household consumption underscores the need for new mechanisms to stimulate domestic demand. China’s strategic push to expand the international use of yuan also necessitates platforms that seamlessly integrate trade, investment, and financial flows. As China prepares its 15th Five-Year Plan (2026-30), Hainan provides a contained setting where deeper institutional opening-up can be tested.

Regionally, Hainan is positioned as a multidimensional hub potentially reshaping the geography of openness in East and Southeast Asia. Comparisons with Singapore and Hong Kong are inevitable. However, Hainan’s special trade policies with the mainland’s vast domestic market provide scale advantages that no city can replicate. Hong Kong may find significant opportunities for collaboration, leveraging its strengths in finance, professional services, and international connectivity.

Hainan could provide another critical anchor point for the key strategic initiatives China has pursued over the past decade — the Belt and Road Initiative, Guangdong-Hong Kong-Macao Greater Bay Area development, tech innovations, and the recently encouraged “AI+” initiatives. While China’s rejuvenation so far is generally viewed as manifestation of its hard power — manufacturing capacity, infrastructure, and technology — the country is simultaneously revealing its soft power through the design and establishment of new institutions and governance. Hainan provides an important place for experimentation, learning, and fine-tuning.

This reflects China’s longstanding approach to reform: experimentation in contained settings, learning from implementation, and scaling successful experiences more broadly.

Hainan can be seen as an experiment in designing institutions that bridge China’s domestic governance system with the operating expectations of global market participants. Its success will lie in showing that China can offer an environment that remains firmly rooted in its own governance framework while being increasingly seen as effective and credible by the international community.

As China continues refining its approach to modernization, the implications will extend far beyond its borders. Other economies — particularly those in the Global South — will observe closely how China structures its institutional and capability building, manages regulatory risks and aligns domestic priorities with increasing global engagement.

The launch of Hainan’s separate customs regime 47 years after Deng Xiaoping initiated China’s reform era reinforces a crucial message: Reform and opening-up is not completed but an ongoing process that will unfold over decades, continuously adapting to changing conditions. Hainan thus can be viewed as a new milestone in how China intends to navigate the next phase of its global engagement.

China’s search for its own modernity continues. For sure, this process will not be straightforward. Experimentation inherently involves risks, adjustment, and learning. However, China’s approach is not random. It is grounded in frameworks and principles that have evolved over several millennia and are now being deployed within a modern political and economic paradigm.

Hainan reflects China’s transition toward a more rules-based approach to opening-up, with relevance that extends beyond the island. It’s both the outcome of earlier experimentation and a platform for testing the next phase.

The author is founder and CEO of Gao Feng Advisory Co, a strategy and management consulting firm with roots in China.

The views do not necessarily reflect those of China Daily.