Wednesday, August 10, 2011

New International Tourism Shopping Island in Hainan

If you are a frequent traveler to China, you may not just want to go to the Great Wall in China and probably you already know something about the Hainan Island, the only tropical island province of the country.

Hainan Island is located at the southernmost tip of the map in China with sea area of approximately 2 million sq km and land area of 35,000 sq km. The island has wonderful sun-kissed coastline and lots of clean beaches comparable to those in Thailand, thus is actually a tropical paradise with excellent tourism resources, beautiful natural environment and pleasant climate. Hainan Island is the only provincial grade special economic zone of China, and is also the largest one in the country.

Last year, the Chinese central government announced to transform Hainan into a new international Tourism Island, on par with popular tourist destinations like Thailand, Hawaii, and Australia. This transformation plan immediately boosted the fixed asset investment in Hainan and also brought substantial speculative money into the island to build new golf courses, transportation services, luxury hotels, high-class real estate properties etc.

Hainan is Becoming a New International Tourism Shopping Island

On 1st January this year, Hainan Island started to implement a pilot shopping tax rebate policy for overseas tourists. Under this policy, overseas tourists can claim for tax rebate at 11% of their purchases at pilot shopping areas in southern Hainan Island when leaving China. However, Hainan tourism industry data shows that this policy has not been as successful as originally expected though the prices of the tax rebated goods are cheaper than the normal prices by 10% to 40%.

On 20 April, China Ministry of Finance (MOF) further implemented a pilot duty-free shopping (DFS) policy to promote Hainan Island as a regional tourism destination for domestic tourists and as a new international tourism island for global tourists. Here are the details about this pilot duty-free shopping (DFS) policy:

(1) The DFS policy imposes limits on purchasing frequency and shopping quota. Visitors, with age at least 18, leaving the Hainan Island by air to another destination on the mainland can benefit from this policy. Visitors living outside the Hainan Island can enjoy duty-free shopping with a maximum limit of RMB 5K twice a year, while the Hainan local residents can only enjoy it (also RMB 5K max) once a year.

(2) The DFS policy imposes limit on shopping categories of imported goods. Tourists can buy imported goods from up to 18 categories of small tourism-related personal consumer goods (not large consumer durables), they are: jewelry, bags, watches, glasses (including sun-glasses), belts, hats, neckties and scarves, shoes, pens, cosmetics, perfumes, handicrafts, candy, clothing apparel, wool, cotton, small leather goods and sporting goods. reflects its commitment to the development of its tourism industry as a vehicle for economic growth.

(3) With this DFS policy, tax discount rate of Hainan Island is already higher than that of Jeju Island in South Korea and Okinawa in Japan which has also run similar duty-free policy. It may even be cheaper than Hong Kong, the premier shopping paradise and tourist destination in Asia.

Here are the major benefits of the pilot duty-free shopping (DFS) policy:

(i) The DFS policy can improve the attractiveness of Hainan Island for higher-end consumers, discourage overseas shopping for domestic consumers, keep the domestic consumption inside the country, and minimize consumption power leaks through Chinese outbound tourism, especially for luxury goods. Statistics last year show that 56% of Chinese consumption was spent overseas, equivalent to USD$13 billion.

(ii) The DFS policy not only can boost tourism consumption but can also stimulate economic growth of Hainan Island. Growth in per capita consumption should be expected in business areas of hotels, aviation, airlines, travel agencies, logistics, restaurants, duty-free shops, food, real estate, transportation, and other many others. China undoubtedly wants to expand domestic consumption through tourism industry development.

(iii) The duty-free shopping (DFS) policy helps to meet the targets set by the 12th 5-Year Plan of Hainan Island. In its 12th 5-Year Plan, Hainan province government should focus on three areas for economy: GDP growth, fixed asset investment, and local government revenues. With the most recent GDP growth of Hainan Island hit +15.8% YoY, Hainan province government has set an average GDP target of +13% YoY in the next 5 years. GDP contribution of Hainan Island is basically 50% by services sector, 30% by industry sector, and 20% by agriculture sector. The current situation is: although emphasis has been put on the tourism in Hainan Island, hotel and catering sectors now make up no more than 4% of the Hainan GDP. Hainan province government therefore wants to further expand its tourism sector in order to meet the above GDP target set by its 12th 5-Year Plan.

(iv) Hainan Island can expedite itself as a tropical paradise and improve overall quality of its tourism services through the DFS policy. It is believed that, on top of the 3S (sea, sun, sand), the potential of Hainan Island is huge and can be much more than just a holiday resort for tourists.

Fair to say, although the DFS policy should promote luxury goods consumption and re-shape the overall image of Hainan tourism, a major drawback is that it will suppress the development of smaller shops which sell lower quality but more affordable goods.

According to the government plan, the long-term goal to build Hainan as a new international tourism island will involve three stages:

(1) The first stage, or a preliminary stage, will be completed by 2013 to promote regional tourism attraction. In fact, duty-free shops of Sanya in Hainan Island have already started to sell luxury goods of internationally renowned brand names including Dior, Chanel, Lancome, Armani etc.

(2) In its second stage, Hainan Island should meet the basic requirements of international tourism island by 2018. Hainan should have its duty-free limits and tax-free varieties expanded to include the whole range of FMCG (Fast Moving Consumer Goods) or CPG (Consumer Packaged Goods).

(3) Finally, with all the necessary actions taken to further improve the Hainan tourism, it should become a world-class international tourism island by 2028.

The necessary actions required to further improve the Hainan tourism should include:

(i) Efforts are necessary for Hainan Island to build up its environment and reputation as a shopping paradise. Despite the tax cut, most tourists still prefer buying luxury goods in Milan, Paris, or Hong Kong. Overall shopping environment and reputation remain to be more important factors than just RMB 5K duty-free quota for tourists.

(ii) Nowadays English speakers are still rare in Hainan Island. In order to better serve international visitors, Hainan Island needs to put more efforts on education to upgrade overall English standard there. It will be totally a mess if international visitors always face difficulties in communication and feel frustrating when they just go shopping outside their hotel in Hainan Island.

(iii) To diversify risk, Hainan Island should not rely solely on developing itself as a luxury shopping centre. In fact, currently we start to see a new trend of three-tiered tourism marketing for Hainan. In addition to the existing "Green" (golf, rainforests) or "Blue" (ocean, or beaches) tourism, now Hainan has started to introduce "Red" (communist) tourism as well. With its tropical climate environment and rich ocean resources, "Blue" tourism of Hainan Island normally performs best in winter period. With rich land resources and large rainforests in central Hainan, "Green" tourism can also attract tourists who love the color of nature. The most recent development of "Red" tourism in Hainan Island, however, can satisfy tourists who love to learn more about the Chinese Communist Party. Historically the island did involve actively in the development of the Communist Party during the Chinese civil war. This kind of "Red" tourism is not new in China as a whole, but it is something new to Hainan.

(iv) In general, Hainan Island is still relatively weak in the level of services provided to tourists, not only for restaurants, entertainment services, but also for medical facilities as well as its overall rescue service system etc. Hainan Island does need better tourism management, planning, marketing, and more qualified tourism services professionals. The island also needs to run more and more new international routes, in order to truly develop Hainan as an international holiday and tourist shopping destination. In addition, Hainan Island should implement measures and policies to protect its valuable tourism environment, and may consider to further promote the development of marine tourism. It may even start to build a tourist theme park, so as to improve the overall visibility of Hainan for worldwide tourists.


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