Maritime Affairs Program (MAP) Handbill Spotlight

Tertiary industry—including retail trades, transportation, hotels and catering services, financial services, and real estate—has traditionally been the prime component of Hainan’s gross domestic product. This island province is well known for its tropical climate and relatively flat land, which makes it a popular tourist and vacation destination. In some reports about Hainan, it is commonly referred to as the “Hawaii of China.”

The island province shares other similarities with Hawaii apart from their tropical climate and tourist attractions. As China’s southernmost province, Hainan is also the home port for China’s South Sea Fleet and Southern Theater Command Air Force. Facing the South China Sea, Hainan is also the forefront of the U.S.-China engagement in the South China Sea region. The 2001 EP-3 incident, also known as the Hainan Island incident, occurred just 110 kilometers (70 miles) southeast of Hainan island. Following the collision with the Chinese aircraft, the damaged U.S. EP-3 aircraft landed at Hainan’s Lingshui airfield without  permission from the Chinese authorities, which later led to diplomatic tensions and Chinese protest. Some smaller features in the South China Sea, claimed by China and some neighboring countries, a long standing territorial dispute,  have observed close warship encounters between the Chinese and American navies in recent years, among others.

While being strategically important to China, Hainan is not one of the most developed areas of the world’s second largest economy. Among the 31 administrative divisions of Mainland China, the province ranked 28th by GDP in 2023. This is due to both the island province’s small population and its unbalanced economic structure. At present, Hainan has a total population of 10.43 million people, which is predominantly rural. Tertiary industry constitutes over 60% of Hainan’s GDP. To address the need for economic growth, Hainan has recently targeted boosting population and adjusting its tourist-reliant economy to a structurally stable economy by building the world’s first free trade port.

Recent Events

As part of Hainan’s aim to boost its economic growth by raising high quality consumption, Hainan has been holding the China International Consumer Products Expo (CICPE) for a consecutive four years, starting in 2021. The 2024 CICPE was held in Haikou on April 18, 2024. The island province’s aim with the CICPE is to bring international brands to the duty-free island and use the expo to boost consumption as China is striving to reinvigorate its consumption.Simultaneously, the island is expecting to complete preparations for its customs closure operation by the end of 2024 as a critical step in its plan to construct the world’s first free trade port. The island is also boosting its connection with the rest of the world as it became the first Chinese province to enact a visa waiver policy for over 50 countries, a policy that has been active since 2018. It was reported at the beginning of 2024 that the island province received over 90 million tourists, domestic and overseas, in 2023.

Keep In Mind

Given Hainan’s geographic location and its proximity to the South China Sea, it will become a hub for China’s maritime logistics, especially after the free trade port becomes fully operational in 2025. While the province has emphasized consumption over industrial development at this point, Hainan’s location, being the gateway of China’s tech hub—the Great Bay Area—will make it an important nexus for manufactured goods, high end or low end, coming in and out of China.

It is also worth noting that, while Hainan’s economic development is on the relative lower end in China, its huge market potential following the construction of the free trade port will give its economic growth a strong boost. The island province achieved a 9.2% GDP growth in 2023, with an industrial output growth rate at 18.5% and 10.3% growth in the service sector. This rapidly developing island will crave financial services in the near future.

As low value-added manufacturing industries continue to move out of China to Southeast Asia, Hainan’s free port will become an important nexus for manufactured goods shipped from Southeast Asia to China. The island already shows potential for developing high quality logistics industries and financial services , which is what China particularly needs during a time of slow economic growth.

That said, Hainan is still at the beginning stage of development, much like Shanghai in the 1990s, and Shenzhen in the 1980s. How Hainan is going to utilize past successful experiences and incorporate sound policies with international business and investment is the key to its transformation from a rural tourist destination to a modern free port. Senior officials from Hainan have notably turned to parties in the U.S. for this particular need. The island province is particularly interested in the U.S. biopharmaceutical industries and financial sectors. During a period of U.S.-China strategic competition, Hainan’s ‘pivot to the U.S.’ could bring a different episode to an overall deteriorating bilateral relationship.