Could the Hainan free trade port provide China unprecedented access to the global coffee sector?

  • In the Hainan region, coffee production grew by 225% in 2022 compared to the previous year
  • As part of the Belt and Road Initiative, a free trade port will now open in Hainan by 2025
  • This partnership will give the Chinese coffee sector access to Southeast Asian markets and beyond

IT’S NO secret how much China has invested in coffee. The consumer end of the supply chain has seen most of this investment, with private funding leading the charge. For example, Centurium Capital bought $240 million worth of shares in Luckin Coffee in 2021. Luckin has now raised over $1.6 billion over six funding rounds.

​​But further up the supply chain, the production and trade of coffee – and the infrastructure around it – are receiving investment, too. 

Despite this, Chinese coffee remains comparatively uncommon in many major consumer markets. Stringent trade regulations have historically been a barrier, and have restricted market access in many areas.

Larger infrastructure investments – like opening a free trade port in Hainan – provide some insight into what the future of the Chinese coffee trade could look like.

While Yunnan is far and away China’s number-one coffee-growing region, Hainan has been the subject of no small amount of investment in recent years. Recently, it has become a major focus and has received substantial support from various levels of government.

Agricultural research has led to the development of ten coffee varieties that are suited to the local environment. In 2022 alone, the area of farmland where coffee was being grown increased by 180%, while yields grew by 22%.

In February 2023, a conference to promote the Hainan Free Trade Port took place in Jakarta, Indonesia. During this event, Hainan State Farms Tropical Products Industry Group Co., Ltd. and Indonesian coffee company Kapal Api Global signed a cooperation agreement to collaborate on development.

The BRI will affect the coffee sector

Belt and Road Initiative

Opening the port is yet another component of the broader Belt and Road Initiative, a global infrastructure development strategy where China establishes free trade agreements with a range of participating countries. The drive behind this is simple – lower barriers to market entry, improve the potential for trade and investment, and consequently foster economic growth.

As far as the Hainan port is concerned, many have spoken about this as China’s answer to Hong Kong’s economic model on the mainland. Hong Kong is known for its liberal trade policies, which have helped it become a hub for international trade and finance.

By opening a free trade port in Hainan, the Chinese government hopes to attract global companies from ASEAN countries and other Belt and Road Initiative nations. The port’s favourable tax policies and opportunities for investment will theoretically increase employment opportunities and drive industrial growth around Hainan and beyond.

For the local coffee industry, the cooperation agreement with Indonesia provides a significant opportunity to connect Hainan with the fourth-largest coffee-producing country in the world – as well as providing access to the broader Southeast Asian market.

“The Chinese market has unlimited potential, and the BRI provides an excellent opportunity for Indonesian companies to find partners and develop international markets,” an executive at Kapal Api China said.

“The preferential policies of the Hainan Free Trade Port provide us with a rare opportunity to cooperate with agricultural enterprises in countries and regions along the ‘Belt and Road’ in Southeast Asia, which can better connect Hainan’s coffee, pepper, and tea with the international market, and in turn become a bridge to promote and deepen cooperation on the BRI,” said Li Yu, chairman of Hainan State Farms Tropical Products Industry Group Co., Ltd.

Ultimately, investment in Hainan’s coffee industry and a partnership with Indonesia indicate China’s ambition to take a more active role in the coffee supply chain throughout Southeast Asia – both to buy and sell coffee. Beyond this, the Belt and Road also helps to improve access to markets in Europe, Africa, and further afield.

The Belt and Road Initiative will benefit China's coffee sector

Not as easy as it seems

There are a number of criticisms of the Belt and Road. Firstly, many argue that BRI projects can trap participating countries in debt to China. Beyond that, critics argue that in some cases, these infrastructure projects primarily benefit Chinese companies and workers, rather than providing mutual economic benefit. There are also a range of environmental, social, and labour concerns historically associated with BRI projects.

While the local coffee industry will surely benefit from this new agreement, some view it as a way for China to take advantage of the industry in neighbouring regions.

“I see it more as branding for China’s investments in foreign infrastructure aimed at easing trade, so all the infrastructure projects that came before BRI are now called BRI projects, as are any investments that fall under this general strategy,” says an anonymous source.

On a broader scale, the initiative has generated geopolitical tension. Some countries view it as a means for China to increase its soft power by expanding its global influence. For example, Italy is under pressure from other Western countries to exit the initiative, having expressed disappointment over the economic benefits of the program.

“It’s shown up China’s protectionism – exports to China have not increased but imports have exploded,” says the anonymous source. “It’s part of a strategy which ultimately aims to make other countries more dependent on China.”

In line with this, it’s clear to see that the Chinese government seeks to establish Hainan as an agricultural trade centre. But this might not be smooth sailing – you only have to look as far as the “Freedom Pineapples” incident to see that.

“China blocked the import of pineapples from Taiwan as they sought to turn Hainan into an island of agricultural excellence,” explains the source. “There’s news of Chinese agricultural espionage of these expensively developed and highly researched Taiwanese pineapple cultivars, which were allegedly stolen and are now being grown on Hainan.”

Ultimately, while the Belt and Road might be good news for Hainan, there’s clearly more to it than meets the eye. Right or wrong, this investment demonstrates China’s ambition to become more relevant across all areas of the coffee supply chain – and there will likely be more to come.

Coffee Intelligence

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