Hainan and a Bold Plan on Cross-Border Fund Flows

The Chinese Communist Party's Central Committee and the State Council jointly released the Master Plan for the Construction of Hainan Free Trade Port on June 1. In his instructions on the Hainan Free Trade Port，CCP General Secretary Xi Jinping stated that building the free trade port is a major strategic decision made by the Central Committee to foster innovation and push ahead with socialism with Chinese characteristics. Focused on overall development at home and abroad，the Plan is of great importance in assuring progress in a new era of China's reform program and the opening up of the economy. Xi also stressed the importance of adhering to the leadership of the CCP and to socialism with Chinese characteristics，while maintaining the demanding requirements of international economic and trade rules，promoting the smooth flow of production factors and building Hainan into a high-quality free trade port.

The Smooth Flow of Capital

A free trade port is a special economic zone with the highest level of openness in the world today. Normally，it refers to a specific customs territory where most goods are exempt from tariffs and there is free movement of people，funds and products. This has been amply demonstrated in practice in China's Hong Kong，Singapore，and Dubai. Among all these factors，the flow of funds is the most critical. China's Hong Kong and Dubai have allowed the free flow of funds since the establishment of their free trade ports. In 1969，Singapore set up its first free trade zone and in 1978，the Financial Supervisory Authority of Singapore issued its Announcement No. 754，which completely eliminated foreign exchange controls and cancelled all foreign exchange management procedures and approval requirements on the flow of funds. Residents and non-residents were allowed to open accounts at home and abroad and transfer funds freely between those accounts. To accommodate the free flow of funds，free trade ports usually adopt stable exchange rate mechanisms. China's Hong Kong and the United Arab Emirates (Dubai) both peg their currency to the US dollar，while Singapore uses a link to a currency basket.

It is worth mentioning that，although funds are allowed to move freely，there are restrictions on trade and investment. (All of the listed restrictions in this section about China's Hong Kong，Singapore and Dubai draw on the information in the International Monetary Fund’s Annual Report on Exchange Arrangements and Exchange Restrictions [2018].)

In terms of trade，except for certain special commodities，most goods can flow freely through the free trade port and are exempt from tariffs. In China's Hong Kong，Singapore and Dubai，restrictions normally apply to the import and export of certain commodities due to public health，safety，and environmental protection considerations or the fulfillment of international trade agreements. Restrictive measures include import and export embargoes，the use of a licensing system and quota limits.

In China's Hong Kong，the importation of chlorofluorocarbons requires an import license and there are quotas，while a licensing regime exists for imports of loose diamonds and Chinese medicines. Exports of formula milk powder (for infants) and Chinese herbal medicines require an export license.

Imports are tax-free in principle，but "health" taxes are levied on imported cigarettes and other tobacco products，as well as alcohol，methanol and other hydrocarbons (including domestically produced ones). Singapore uses a positive list as well as a negative list to manage trade. Items on the positive list can be imported without license，while items on the negative list cannot be imported due to health，safety and environmental protection considerations. Importing or transshipping certain special goods requires prior approval or licensing. For exports，a licensing system is in effect. For instance，the export of rubber and ozone-depleting substances requires an export license. Dubai adopts a licensing system for imports. Only goods listed on the license can be imported. Additionally，imports of goods manufactured by Israel and foreign companies blacklisted by the Arab League are banned，while trade with Qatar is strictly forbidden. Imports of some other goods are also prohibited due to health，safety and ethical considerations.

In terms of investment，China's Hong Kong，Singapore and Dubai apply prudent management policies to activities in their financial sectors and impose restrictions on investments in their local market by non-residents，but there is no restriction on overseas investments by local residents. Restrictions on non-residents' investments include:

Industry restrictions: China's Hong Kong imposes regulatory requirements on investments in the local broadcasting industry，while no other restrictions are applied to direct investments in other fields. Dubai (United Arab Emirates) stipulates that non-residents shall hold no more than 49% of the total equity of a company while investing in local markets，though in the free trade port，this proportion can be 100%.

Tax restrictions on purchases of real estate in the local market: In China's Hong Kong，non-residents who purchase a home pay a 15% stamp duty in accordance with the Stamp Duty Ordinance. In Singapore，non-resides are allowed to freely purchase a residential unit，but that does not include public housing. Purchases of real estate must be approved by the Singapore Land Authority. Both properties and real estate can be purchased by non-residents in Dubai，but all transactions are subject to certain rules and regulations.

There are restrictions on the issuance and purchase of securities in the local market by non-residents，including registration and currency requirements. In Singapore non-residents may sell or issue stocks and bonds，but non-resident financial institutions must convert Singapore dollars obtained through Singapore dollar loans (over 5 million Singapore dollars)，as well as stock listings and bond issuances into foreign currencies before they can transfer funds overseas for overseas financial activities. Non-residents must register and submit a prospectus before issuing stock，bonds or notes as well as mutual investment funds to Singapore investors. Dubai allows non-residents to issue stock and bonds under the regulatory framework of local authorities. Non-residents in Dubai’s free trade port are allowed to purchase up to 100% of a company's equity in the local market，while the proportion is capped at 49% in principle for other regions in the United Arab Emirates. As for derivatives，the China's Hong Kong Stock Exchange has clear management requirements over the information disclosure and position limits for derivatives.

Prudent management over the financial sector: In China's Hong Kong，loans and lines of credit that financial institutions provide to any one non-resident customer shall not exceed 25% of their capital base. In Singapore，the liquidity coverage ratio (LCR) of all currencies shall be 100%. In Dubai，banks subject to the liquidity coverage ratio (LCR) requirement must retain eligible liquid assets，and those liquid assets must be consistent with the net outflow currency. Moreover，China's Hong Kong requires companies engaged in banking，insurance，securities and futures transactions，to obtain a license or authorization regardless of their place of registration.

Inbound and outbound cash declaration management: For anti-money laundering and anti-terrorist financing purposes，inbound and outbound foreign currency banknotes and unregistered bills exceeding the stipulated limit must be declared. In Singapore，the limit is 20,000 Singapore dollars or the equivalent in foreign currency，in such case a report must be submitted. The limit is 100,000 dirham or the equivalent in foreign currency for Dubai.

Funds exchanges with sanctioned countries are strictly prohibited according to the sanctions resolutions of the United Nation Security Council.

Chinese Characteristics，International Economic and Trade Rules

During the construction of the Hainan Free Trade Port，we should fully learn from the experiences of China's Hong Kong，Singapore and Dubai，and emphasize the need for reform and innovation. We should always be ready for worst-case scenarios. We need to remember that China's Hong Kong，阅读全部文章，请登录数字版阅读账户。 没有账户？ 立即购买数字版杂志