Hainan’s free trade port is becoming a growing force in private equity

The Chinese province aims to take its place among the world’s most important free trade ports, says Joanne Zhou, senior accountant, fund services, and Shuting Li, senior manager, fund services, Intertrust Group

The tropical island province of Hainan is emerging as a globally significant free trade port (FTP). It’s also one of China’s most important and high-profile economic liberalisation initiatives.

In the past two years, more than 180 policies have been introduced in Hainan to accelerate the growth of trade and investment.

These policies are already having a major impact, although the fundamentals of the free port system are still being consolidated.

Hainan is a growing centre for tourism, duty-free shopping, high-tech industries and tropical agriculture, as well as international trade. It also provides new opportunities for financial innovation and has opened the door to the private equity market.

Low barriers to entry in Hainan

Private equity is booming in the province. According to the Asset Management Association of China (AMAC), the number of private equity managers in Hainan leapt from 120 in 2021 to 540 in August 2022.

This results from a concerted effort to attract funds, with low barriers to formation, generous tax incentives and an increasingly sophisticated financial infrastructure.

In addition, the main formation and registration process for Hainan Qualified Foreign Limited Partnership (QFLP) entities is now governed by a letter-of-recommendation mechanism.

This means registration, which can be finalised in about six weeks during normal time, only requires a letter of recommendation from a competent authority.

Another point to note is that Hainan is encouraging a secondary market in private equity transactions. In the next two or three years, this market is expected to develop rapidly.

Hainan’s tax incentives for companies and individuals

High-net-worth individuals and companies also enjoy generous tax and benefit incentives. These include:

• 15% corporate income tax. This applies to businesses in encouraged industries registered and operating in the Hainan FTP. It compares with a general Chinese corporate tax rate of 25%.
• 15% maximum income tax, aimed at attracting talented individuals. This compares with a maximum personal tax rate of 45% elsewhere in China.
• Special awards help firms in the province to recruit in-demand talent, including support for resettlement costs, house and car purchases, medical care and more.

These initiatives have had considerable success in attracting businesses, private equity funds and the human talent any international financial hub needs.

Since 2018, Hainan has attracted more than 400,000 highly skilled people, 10 times more than in the previous four years combined.

Taken together, Hainan’s “double 15%” tax policy compares favourably with international financial centres such as Singapore, where a 17% corporate tax rate and a 22% income tax rate are applied, and Hong Kong, where rates range from 7.5% to 16.5% in corporate income tax and top 15% in income tax.

Expanding investment targets in Hainan

Private equity and venture capital are being lured by Hainan’s rapid economic development.

This is driven by tax and trade liberalisation policies, alongside government-backed development initiatives. These include the Jiangdong New Area development zone in Haikou and several high-tech innovation parks in the tourism-centred city of Sanya.

The results of all this activity are clear. In 2013 there were 310,000 registered legal entities in Hainan. Today there are nearly two million.

This represents a large and growing portfolio of potential investment targets – one more reason to keep a close eye on Hainan’s development as an emerging centre for private equity and venture capital investment.

How Intertrust Group can help in Hainan

Intertrust Group is a publicly listed company with 70 years’ experience providing world-class trust and corporate services to clients around the world. Any assets management companies looking to the Hainan market can rely on Intertrust Group for a full range of corporate services and administration support for funds/assets managers.

• We can set up and handle liquidation or deregistration for entities including wholly owned foreign enterprises, joint ventures and limited partnerships, and help with applying for business licenses.
• We manage bank accounts, assist in preparing financial reports (IFRS adoption and US GAAP conversion), payroll and tax compliance services.
• We also can help asset managers outsource their operational functions as much as possible for them to focus on core business and investment decisions.