China targets tropical Hainan for world’s biggest duty-free area

China is planning to turn a tropical island province roughly the size of Belgium into the world’s largest duty-free shopping zone, as it tries to persuade shoppers to buy their luxury goods at home and stimulate a lagging domestic economy.

Policymakers aim to establish a single duty-free zone with a separate customs system in Hainan, China’s southernmost province, as early as next year. Shoppers in most Chinese jurisdictions pay high taxes on foreign luxury goods, making low or duty-free zones particularly attractive, and Beijing hopes to turn Hainan into an engine for domestic consumption that can compete with rival duty-free destinations such as South Korea’s Jeju Island as well as duty-paid stores in Europe.

Authorities have already reduced Hainan’s income tax rate for certain companies to 15 per cent, from 25 per cent in most of the country, and scrapped import duties on some goods. It has also extended visa-free access to citizens of 59 countries. The creation of a separate customs zone next year will further simplify taxes on luxury purchases in Hainan.

“If you look at Hainan island, the main purpose is to build a whole duty-free zone which aims to pull some of duty-free sales from overseas back to China,” said Charlie Chen, head of Asian research at China Renaissance, pointing to the provincial government’s annual duty-free sales target of Rmb300bn ($42bn) by about 2025. “That’s a huge market.”

Beijing first introduced offshore duty-free shopping in Hainan in 2011 in an effort to boost growth and narrow the gap with richer inland provinces. The industry grew after the government tripled purchase limits in 2020, just as pandemic-era restrictions impeded travel to overseas hubs.

Amid slowing Chinese economic growth and limited overseas flights, shoppers have flocked to the palm-fringed southern island — already home to several of the world’s largest such shopping centres — for shorter, more affordable luxury shopping breaks.

The 280,000 sq m Haikou International Duty Free City, the world’s largest duty-free shopping mall, opened on the north of Hainan in 2022, joining the previous, 12,000 sq m duty-free area on the south of the island.

Chen of China Renaissance said that the island was a “beneficiary of the consumption downgrade”, with shoppers opting for shorter domestic trips and buying the less high-end products offered in duty-free outlets. Brands tended to sell the latest, most expensive luxury items in their flagship duty-paid stores in mainland China and Europe, he said.

Defying difficulties for western luxury groups in the Chinese market, Hainan notched up Rmb2.49bn ($345mn) in duty-free sales over the lunar new year in February, up 60 per cent from the previous year, according to customs data.

The island’s duty-free market has also caught the attention of western companies.

DFS, the travel retail unit of luxury giant LVMH, last year announced plans to invest in a 128,000 sq m “seven-star” luxury retail and entertainment site near the southern city of Sanya.

US-based Tapestry, which owns the Coach, Kate Spade and Stuart Weitzman brands, chose Hainan as the headquarters for its China travel retail business in 2022, according to Invest Hainan, a government agency. Tapestry did not respond to a request for comment.

Meanwhile, this comes amid a tough climate for the luxury sector. Falling Asia sales at Gucci triggered a profit warning from French luxury conglomerate Kering in March.

Stricter rules on daigou, shoppers who purchase items in lower-tax jurisdictions then resell them for profit in mainland China, also dented Hainan sales of brands including L’Oréal last year.

Chen Yizhe, a watch seller for a western luxury brand in the world’s largest duty-free shopping mall, in the provincial capital Haikou, said that duty-free sales had dipped to about 80 per cent of 2023 levels this year, as pent-up demand from the Covid-19 pandemic fizzled out and shoppers travelled abroad.

“In general, the economy this year is not as good,” he said, but added he hoped sales would “slowly improve” over the coming months as more infrastructure was completed.

In the mall’s VIP area — available for those who spend Rmb100,000 at its owner China Duty Free over three years — the bar is stocked with French brandy and Scotch whisky, while bookable meeting rooms come with en suite showers and soaps from Estée Lauder-owned Le Labo.

Tom Zhou, a business-owner in his 50s from China’s northern Hebei province, said he planned to spend about Rmb50,000-Rmb60,000 ($6,900-$8,300) on luxury clothes and jewellery on his latest annual pilgrimage to the complex.

Hainan was “more convenient” than traditional duty-free destinations overseas, or Hong Kong and Macau, because he did not need a visa and there was no limit on how long or often he could visit and the treatment he received from staff was better, he said.

“In Hong Kong the service is not as good as in our mainland,” he said, adorned in a Burberry shirt and Louis Vuitton sneakers and clutching a new necklace from Van Cleef. “It can’t compare.”

Additional reporting by Andy Lin in Hong Kong and Adrienne Klasa in Paris