China is positioning Hainan as a duty-free haven. Will it fulfill its potential? š“| Following the yuan
The Chinese government wants Hainan to be ready for independent Customs operations by 2025. How do the consumers feel about it as a shopping destination?
Melody Xuās social media posts took an unexpected turn in 2021.Ā
From posting daily life updates, the English teacher switched to sharing luxury items on WeChat. She offered discounts on high-end products sourced from Hainan, praising the governmentās tax exemptions and ābeneficiary policiesā to promote the islandās economy.Ā
As China closed its international borders in 2020 to curb the spread of COVID-19, the countryās southernmost province became a hotspot for consumers unable to travel abroad but still yearned for luxury goods. Seeing an opportunity to make a profit, many people like Xu became part-time daigou āĀ those who buy luxury goods from abroad and sell them at a cheaper price than authorized retailers in China ā banking on the central governmentās tax exemption to international and domestic consumers.Ā
Hainanās duty-free status, first piloted in 2011, aligns with Chinaās long-term plan to establish the island province as a free trade port by 2025. The tax-free status aims to lure both foreign and domestic investments while boosting the local economy.Ā
āHainan, as an island, is undoubtedly the best choice,āĀ Wang Jianya, Deloitteās China consulting partner specializing in Hainan, told
.Hainanās duty-free boom
The state-owned China Duty Free Group (601888.SH), one of the largest tax-free retail chains in the country, opened its first duty-free store in Hainan in 2011. Currently, it runs five duty-free stores ā two in the resort town of Sanya and three in the provincial capital Haikou ā alongside outlets from Hainan Tourism Investment Duty Free and Sunrise Duty Free.
Hainanās duty-free shopping has seen a steady rise since 2020, as the government raised the annual purchase limit to 100,000 yuan (US$13,800) from 30,000 yuan to attract consumers who flocked to the island as international travel came to a standstill. Duty-free sales that year topped 32 billion yuan, a 127% increase from 2019, while it reached over 43 billion yuan in 2023.Ā
As of June 2022, 90.6 billion yuan worth of duty-free items were sold in Hainan since the tax-free quota was lifted, according to customs data. More than 12 million travelers shop in the islandās duty-free malls every day, with daily sales reaching an average of 124 million yuan.Ā
In response to rising consumer demand, the China Duty Free Group opened the Haikou International Duty Free Shopping Complex in 2022. Covering a sprawling area of 280,000 square meters, it is said to be the largest mall of its kind in the world.Ā
Though the new duty-free mall offers hundreds of items, skin care products from top global brands remain a consumer favorite in China, according to Luo Kongwen, who works as a daigou. Many consumers also opt for such products, considering the islandās duty-free shops offer the ābest market price.āĀ
Hainanās duty-free shops have also become a go-to destination for many domestic consumers outside of bigger metropolises and those wanting to shop at home, indicating a growing demand.Ā
Lu Fei, a homemaker from a third-tier city in the eastern province of Jiangsu, frequently traveled to Hong Kong for shopping before the pandemic. During the past Lunar New Year, upon discovering that a bracelet from the French luxury jeweler Van Cleef & Arpels was about 3,000 yuan cheaper in Hainan than on the mainland, she decided to ask a friend to buy it through daigou.Ā
āThere were rumors on Xiaohongshu about a price increase, so I ended up buying it in Shanghai,ā she told Following the Yuan. āI couldnāt wait that long.ā
Lu said that comments on the social app claimed that Hainan offered āthe best priceā for the bracelet compared to Hong Kong and Japan.Ā
A survey of seven consumer profiles showed Milan, Hainan, and Hong Kong ā in no particular order ā as their preferred destination for traveling and purchasing luxury items, according to the 2023 Hainan travel retail market whitepaper by accounting firm KPMG and Moodie Davitt Report.Ā
The report added that consumers in second-tier cities, with increased income and economic development, have greater purchasing power and appetite for consumer goods, mostly to reflect status and seek community approval. However, the demography may also extend to smaller, economically developed cities.Ā
Li Ling, another homemaker from Shaoyang, a fourth-tier city in the central Hunan province who owns a property in Hainan, said she travels to the island at least once a year and routinely stops by the duty-free shops to buy products from the luxury skincare brand La Mer.Ā
āI donāt compare prices, but I believe it would make a budget if I buy from Hainan duty-free shop,ā she told Following the Yuan.Ā
A promising future?
In recent years, Xiaohongshu has been flooded with the latest consumer trend videos, becoming a one-stop platform for scanning shopping tips in Hainan. Searches for keywords such as āHainan duty-free shopā yield hundreds of videos offering suggestions to university students and others holidaying on the island on making tax-free purchases for resale.Ā
Li Yilin, a university student from the southern province of Guangdong, shared on WeChat that she bought a doll from toy manufacturer Nici for a price ācheaper than Taobaoā while visiting Hainan for a concert, though she was not planning to resell.Ā
āThis could be a new form of daigou,ā Wang Yuanlin, a 31-year-old human resource officer in Hainan, told Following the Yuan. āThere are a lot of scammers posing as university students.āĀ
To deter such activities, authorities are cracking down on people reselling products from the island to the mainland and evading taxes. In 2023, the number of daigou arrested in Hainan rose by 28.9% compared with 2022, according to the provincial government.Ā
The China Duty Free shops in Hainan have also introduced a mini-app on WeChat, offering discounts and encouraging consumers to report shoppers spending tens of thousands of yuan. Additionally, capping individual purchases on liquors, perfumes, and cosmetics.
Such measures have helped in curbing the number of daigou in recent months, Zeng Dewei, an employee at a China Duty Free store in Hainan, told Following the Yuan.Ā
Analysts and brand representatives said the curb echoes a more sustainable approach to Hainanās development into a free trade port. While the island has prospects for favorable long-term growth, the daigou crackdown wouldĀ ācreate significant short-term headwindsā in the transition period, Tracey Travis, executive vice president and chief financial officer of the EstĆ©e Lauder Companies told Moodie Davitt Report.Ā
To combat such headwinds, risk analysts like Wang from Deloitte said that the central authorities aim to promote other activities apart from duty-free shopping. She added that cities, including Wanning, have already become popular for surfing.Ā
Hainan received 90.62 million domestic and foreign tourists in 2023, marking a 49.9% year-on-year increase from the previous year and an 8.3% rise compared with pre-pandemic levels in 2019, according to provincial officials.
āPeople are not just coming to Hainan for purely superficial travels now,ā Wang said. āThey are also taking advantage of the sports environment and sporting merchandise in duty-free stores.āĀ
In 2021, Hainan also introduced a talent acquisition program with higher salaries and eased procedures to register businesses and open bank accounts for new businesses.Ā
āIn terms of communication, there is still a certain gap in management logic in the early days,ā she said. āHowever, significant progress is being made at the top levels, both in companies and government, and there are many common grounds to work on these days.āĀ
Such open policies have led people like Xu, who quit her daigou job, to reconsider their options in Hainan. Recently, she shared a post about Bielefeld University of Applied Sciences opening its campus in Hainan, which the local government said will be Chinaās first āforeign-run campusā as an independent legal entity.
As a teacher, this has made Xu hopeful that she could eventually secure a bigger opportunity in Hainanās education sector despite facing bumps in her daigou job. She is optimistic about the potential that Hainan promises.Ā š
Editor: Bibek Bhandari
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