Hainan, the new Hong Kong and more

China's latest free trade zone in the island province of Hainan in the southernmost part of the country caps decades of measured opening up to the global economy. Sitting at the heart of one of the world's biggest free trade blocs that counts 15 countries in the Asia Pacific as members, China needs to establish its credentials to other regional trade blocs about openness to trade and investment. The Hainan project caps a string of free trade zones that have drawn foreign investment into China. An island the size of Taiwan with no local taxes, world-beating infrastructure and a trained workforce make it an unbeatable combination. It is also China's solution to manufacturing supply chains seeking to diversify out of the mainland into other parts of Asia.

Apart from the scale of this Chinese experiment with liberalisation, Hainan is a signal of the Chinese Communist Party's acceptance of market forces. If - and it's a big if - Hainan can replicate Taiwan or Japan's success, Beijing could be convinced about exposing more of the Chinese economy to capitalism. Will democracy follow? The speed at which Hainan closes in on Hong Kong will be a metric worth following. For now though, the idea is to reverse a decline in foreign investment while trying to pump up domestic consumption. China will eventually have to restructure its economy to balance consumption and investment, and Hainan's experience should inform policy adjustments.

China has the biggest stake in upholding globalisation even at the risk of a trade war with the US, which on its part has to restructure its economy. Flavour of the season in Washington is protectionism. But that risks isolating the world's biggest economy. China can tame these forces by holding out the prospect of liberalisation. By making an entire province, although the smallest one, a free trade zone, Beijing has upped the ante and is selling capitalism to a world where the US is going in the other direction. The rest of the world will have to match it, if it wishes to make a dent in China's trade surplus.