Will Hainan overtake Hong Kong?

China’s largest free-trade port is preparing for a sweeping customs transformation that could reshape the country’s duty-free beauty market while opening a new front in medical tourism. On December 18, the Hainan Free Trade Port will formally launch “customs closure” operations, converting the tropical island into a “domestic yet outside customs” zone with extensive tariff exemptions and expanded product coverage. For beauty, the policy is set to reinforce Hainan’s role as China’s most important offshore duty-free hub. Since 2011, when the island’s offshore duty-free policy began, sales have reached 250.1 billion RMB ($34.4 billion) through March 2025, with fragrance and cosmetics maintaining a share above 50% in the overall offshore duty-free category. Haikou Customs data underscores the segment’s dominance in driving tourist spending and its strategic importance for global beauty groups. Hainan zero-tariff expansion and cost reductions Under the new framework, the number of zero-tariff product categories will rise from 1,900 to 6,600, covering 74% of all customs codes compared with the current 21%. This will widen access to high-value imported goods and further compress price gaps between duty-free and domestic channels. In beauty, favored nations are often given tariffs between 1% for skincare to 6.5% for soaps and surfactants (cleansers). The removal of import duties will trim costs across the board, allowing greater pricing flexibility and improved margins. The value-added processing rule adds another lever: goods made with imported components that undergo more than 30% value-added processing in Hainan can enter the mainland without import duties, subject only to VAT and consumption tax. As of March, the value of processed goods entering the domestic market from Hainan had reached 7.55 billion RMB ($1.05 billion), saving 601 million RMB ($83.7 million) in duties. For beauty players, the combination of tariff elimination and processing incentives creates scope for developing Hainan-exclusive product lines, localized packaging, or hybrid distribution models linking duty-free sales with domestic e-commerce and specialty retail. Duty-free beauty’s competitive landscape International beauty houses have spent years building Hainan footprints in anticipation of the closure. Kao opened its first mainland China duty-free beauty store there in 2021. Shiseido has six brands in Haikou International Duty-Free City and calls the island “a strategic growth engine” for Asian travel retail. L’Oréal brought 19 brands to the island in one swoop in 2022, followed by a Lancôme global flagship in 2024. Estée Lauder opened La Mer’s largest duty-free store worldwide in 2023, while Procter & Gamble’s SK-II launched its first global duty-free flagship in Hainan in 2024. Even supply-chain functions are moving in. Estée Lauder’s Asia-Pacific travel retail logistics center and China headquarters are now based in the free-trade port, signaling longer-term integration. The December policy shift will likely trigger another wave of expansion. Morgan Stanley forecasts the broader duty-free category overhaul will benefit China Duty Free Group, which dominates Hainan retail, though it warns that licensing details and anti-parallel-trade controls remain unclear. C-beauty’s big opportunity Hainan’s allure isn’t just for the global giants. Chinese brands are edging into the same duty-free corridors, positioning themselves alongside premium imports. In early 2024, C-beauty label Florasis opened its first independent duty-free store in CDF Sanya International Duty-Free City. Domestic perfume house Documents debuted in both Sanya and Haikou international duty-free complexes. Domestic players can use the processing incentives to reduce raw-material costs, enhance brand perception through duty-free positioning and build export-ready product lines using Hainan as a manufacturing and marketing base. Long term, Hainan could function as a launchpad for Chinese beauty’s global expansion, with research, design and brand storytelling developed on the island and scaled through mainland production and overseas distribution. Market risks and sensitivities Despite the potential opportunities, the shift carries risks. Price competition in duty-free beauty is already intense, and expanded zero-tariff access may further compress margins. Regulatory controls on the “second line” — the border between Hainan and the mainland — will be critical to prevent gray-market diversion. Some stakeholders are watching for clarity on licensing rules and anti-smuggling measures, as policy uncertainty could slow investment or trigger supply chain inefficiencies. In addition, while the policy offers cost advantages, its benefits will vary based on each company’s scale, product mix and ability to localize operations. Medical tourism: A strategic and adjacent sector Hainan’s ambitions extend beyond retail. The province is accelerating its push to become a leading medical tourism hub, aiming to triple the number of medical tourists using local services over the next two years. The initiative follows South Korea’s decision to scrap tax rebates for foreigners undergoing cosmetic surgery, a move likely to redirect some demand toward alternative destinations. By integrating medical tourism into its free-trade framework, Hainan is positioning itself to capture both healthcare and beauty-related spending. Plastic surgery, dermatology and wellness treatments could become complementary draws for high-spending tourists already visiting for duty-free shopping. The combination of tariff-free luxury goods and advanced medical services could differentiate Hainan from other Asia-Pacific tourism markets, anchoring repeat visitation and boosting per-capita spend. Hainan market outlook In 2023, Hainan imported 16.68 billion RMB ($2.3 billion) worth of beauty and skincare products, a figure expected to climb as zero-tariff expansion and processing incentives take effect. The convergence of duty-free reform, brand investment and adjacent sector development could accelerate the island’s transition from seasonal tourism hub to year-round commercial center. Global beauty groups are likely to deepen their integration in Hainan’s logistics and retail infrastructure, using the port as a testing ground for experiential retail, product innovation and omni-channel strategies. Domestic brands, meanwhile, face a high-stakes opportunity to elevate their positioning and expand internationally by leveraging the island’s unique trade and production advantages. Hainan’s customs closure signals more than a tariff overhaul. It represents a structural shift in China’s gateway to global beauty and luxury, positioning the island as both a permanent hub for high-end retail and a growth engine for medical tourism. By combining duty-free advantages with healthcare services, Hainan is creating a dual proposition that could draw steady flows of affluent visitors. The changes will also test whether domestic brands can scale alongside entrenched multinationals, turning policy incentives into lasting competitive strength in one of Asia’s most contested consumer arenas.

Will Hainan overtake Hong Kong?

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Published August 13, 2025

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Will Hainan overtake Hong Kong?