Summary:
The “Overall Plan for the Construction of Hainan Free Trade Port” was officially released in May 2020. In 2025, Hainan will launch independent customs operations, realizing “first-line liberalization, second-line management, and freedom within the island.”Once it becomes an independent customs territory, Hainan's market entities and their commodities, labor services, and financial assets will have offshore legal attributes.The movement and management of people, financial assets, and property will follow the Hainan Free Trade Port Law and its supporting regulations, which are very different from the laws and regulations on the mainland, and will reflect the most advanced and competitive international free port management requirements, particularly in terms of economic activities. Thus, the attributes of the people, financial assets, and property within Hainan's offshore operations must be identified and strict separation from the mainland achieved before the island can be open to trading with the outside world at a high level. Finance is essentially a process of resource allocation. After becoming an independent customs territory, the requirements for the financial operations and services of Hainan will increase. They must effectively serve the economic activities of the free port with its offshore attributes and characteristics, provide matching funds and financial asset transactions and settlements, and effectively control risks. However, in the modern monetary and financial system, most deposit currencies and financial assets are recorded, held, and escrowed in electronic rather than physical form. Defining “first-line” and “second-line” financial assets is therefore challenging and complex, which in turn increases the complexity and difficulty of financial operations and management. We propose that after Hainan becomes an independent customs territory, rational investors will choose to hold and trade their financial assets in accordance with offshore regulations. If large-scale onshore bank deposits and financial assets are held on the island after it becomes an independent territory, the cost of compliance of market entities and the challenges facing the government and financial authorities in performing their duties will increase. The government should therefore support and encourage market entities to gradually convert their bank deposits and financial assets from onshore to offshore. Thus, the operating mode and system construction of commercial banks, and the central bank's currency issuance, clearing arrangements, infrastructure construction, and related supervision and management must be adjusted and transformed accordingly. Bank accounts are used to record and reflect economic and financial activities and are the basis for supervision and tax collection. In terms of fund payments and settlement, specific policies and rules need to be implemented through accounts. After becoming an independent customs territory, the accounts that record the payments, settlements, and balances of Hainan market entities and their management rules must also comply with and reflect the laws and regulations of Hainan Free Trade Port, and functionally meet the requirements for services, support, and the facilitation of offshore economic and financial activities, in addition to facilitating government supervision. However, the operations and the implementation of rules in the existing bank account system in China are unified, and cannot independently record and reflect the property rights of offshore funds and settlement activities for Hainan market entities. In terms of specific supervision and tax collection, it is impossible to distinguish between onshore and offshore assets of a market entity and its related economic activities, or to achieve “second-line management,” let alone “first-line liberalization and island freedom.”The relatively independent free trade account, even if changes are made to its design and function, is not able to provide services and infrastructure support for the economic and financial activities of Hainan Free Trade Port. Thus, we conclude that it is necessary to begin establishing an account system that can support the economic and financial activities of Hainan Free Trade Port, which will be independent of the mainland bank account system, and covers the Central Bank of Hainan, commercial banks, and other related financial institutions. In addition, account rules, supervision and management, financial market construction, central bank currency issuance, and other micro and macro prudential management activities, along with the necessary supporting infrastructure, should be considered.
周诚君. 自由贸易港需要什么样的金融服务？——再论FT账户和海南自由贸易港的账户选择问题[J]. 金融研究, 2020, 486(12): 40-55.
ZHOU Chengjun. What Kind of Financial Services does a Free Trade Port Need？ Revisiting the Free Trade Account and the Account Selection of Hainan Free Trade Port. Journal of Financial Research, 2020, 486(12): 40-55.
