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The Global Times is out with a piece that notes how China on Monday unveiled a “megaproject to build its largest-yet special economic zone in South China’s Hainan Province into a world-class free trade port, with one of its major focuses on escalating the development of its financial market.”

Lead paragraphs

Given that the Hong Kong Special Administrative Region has served as China’s largest free trade port but is now being threatened by the US with revocation of its special privileges, there are rising concerns that Hong Kong’s future status and role are under a cloud, and the city may even be replaced by Hainan.

Though similar concerns were raised in 2018, Hainan will be cultivated into a new financial center to develop alongside Hong Kong in a coordinated manner, rather than replacing Hong Kong as an international financial hub.

Without aiming to replace any aspect of Hong Kong or any other economic entities, building Hainan into a free trade port with Chinese characteristics will be similar to China’s former campaign to cultivate the Shenzhen Special Economic Zone – it is a step to deepen China’s reform and opening-up. 

Key points

Hainan will become a free trade port closely related to Hong Kong, yet will maintain some distance. 

Hainan is capable of attracting financial institutions to extend long-term investment businesses from Hong Kong.

Hong Kong’s major advantages are free capital convertibility, entry and exit, as well as a sound shorting and hedging mechanism, which is more suitable for short-term capital hoping for high returns. 

Hainan, with an increasingly open financial market, will be a better choice for foreign investors who intend to further expand in the Chinese mainland market in the long run.

Foreign capital could also seek different kinds of investments in the two regions, like buying fixed income products in Hong Kong and launching high-tech venture investments in Hainan.

It would be a triple-win strategy for Hainan, Hong Kong and foreign capital, combining the advantages of the two financial markets and allowing investors to form better portfolios to make both short-term and long-term profits.

China is cultivating new economic growth points while actively adapting to the changing international trade order.

European and American economies are experiencing downturns, which have reduced their say in the global economy.

The US is trying to change the order and rebuild international trade rules in its own favor so as to maintain its global economic dominance.

Before new international trade rules are established, China’s proactive move to build Hainan as a world-class free trade port could pave the way for it to hold a stronger position in the future.

While constructing a high-quality, high-standard Hainan free trade port, the future development of the island province’s foreign trade is facing rosy opportunities.

Hainan sits geographically in the middle of the Chinese mainland, Japan and South Korea, as well as Southeast Asian nations like Vietnam and Thailand.

ASEAN markets and the Chinese mainland have effectively brought the virus under control, their demand has surged amid economic recovery, especially for health, electronic and internet products, leading to a rebound in Hainan’s exports to these markets.

Market implications

For a long term macro outlook, this is negative for the US dollar and US treasuries. However, it is highly promising for emerging markets, alternative currencies and crypto as well as global trade. It may mean investors will think twice about pulling their capital from Hong Kong and increase risk appetite.