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Chinese tourism
in an uncertain world Jan/Feb 2017 Download PDF

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One of the major driving forces behind global air traffic growth in the next ten years will be an expected surge in Chinese outbound tourism. With political changes in the US and Europe making continuing globalisation a little more uncertain, a review of the fundamentals affecting Chinese travel might be useful.

Final 2016 Chinese tourist statistics are expected to show an apparent marked slowdown in the rate of growth. Based on first half numbers, the annual outbound tourism total will be around 124m, an increase of only 3% on 2015, in contrast to the norm of 15% pa over the past five years. However, the main reason for the disappointing 2016 outcome was a sharp fall in visits to Hong Kong and Macau, largely because the PRC authorities imposed access restrictions for residents of the neighbouring city of Shenzhen. Travel from China to the rest of the world was as robust as ever with an estimated 16% increase, according to COTRI (China Outbound Tourism Research Institute).

As summarised in the chart above, travel to “passport” countries has been growing faster than that to Hong Kong and Macau (though those two autonomous regions still account for 58% of the total; add in Taiwan and the total for Greater China goes to 62%).

The growth rate for “passport” countries, according to an authoritative study by Goldman Sachs (December 2015), will average 10%pa to 2015 while that for Hong Kong/Macau will be just 2.5%pa. This will bring the Chinese outbound total to 220m tourists by 2025; this eclipses the 18m for Japan today, and widely surpasses the US total of 68m in 2015.

As for the forecast split between destinations, Goldman’s (necessarily tentative) forecast is shown left. Apart from Hong Kong/Macau all destinations will double with travel to Japan growing most strongly (the recent explosion of Chinese visits suggest that that prediction is too low, unless hotel capacity acts as a brake). Europe is seen as a much more important destination than the US or Australia, reflecting the attraction of antiquities and the importance of photographs of the Eiffel Tower in the background

The overall forecast may prove conservative. At the 2017 Davos Forum, the Chinese president Xi Jinping alluded to 700m trips outside Greater China over the next five years. This is more than double the Goldman forecast for “passport” countries. With a population of 1.4 billion, small changes in leisure activity translate into large numbers of Chinese.

To a large extent the Chinese government controls the level of tourism through the issue of passports and visas. Currently only 4%, about 55m, of the Chinese population hold a passport (for comparison, about 35% of US citizens and 85% of UK citizens have passports). In line with the development of the fairly affluent “urban middle” passport ownership in China should grow to 12% by 2025, or about 150m.

The UK policy towards Chinese visas has been complicated, with Willie Walsh expressing IAG’s frustration on several occasions. The basic problem is that Chinese visitors wishing to do the grand European tour need two visas — one for the Schengen area and another for the UK. This was partly solved in 2015 through the introduction of a joint visa application process which avoided duplication of paperwork, and by the introduction of multiple-visit two-year visas in early 2016.

Since then things have got more complicated again when the Schengen visa went biometric. This meant that every potential Chinese tourist physically has to turn up at a visa application centre to be finger-printed.

Although Chinese spending in the UK may in the short term be boosted by the sharp depreciation of sterling which was the result of the Brexit vote, in the longer term Brexit inevitably adds uncertainty.. There may be import duties between the UK and the rest of Europe, and border crossings will probably be slower. There is also the possibility of a Le Pen victory of the French presidential elections, and the implementation of further border controls.

Facilitating Chinese tourism to Europe is becoming a new policy issue to be addressed probably outside the established EU framework. One suggestion is for a bilateral British-French visa which would give access to the two cities, Paris and London, where the Chinese predominantly want to go.

As for US, who knows in the current climate? The US is supposed to be one of the fastest growing markets for Chinese tourism, and encouraging Chinese tourism makes emminent economic sense — it is in effect an American export and would help somewhat in closing the balance of payments. But China is being lambasted as a “currency manipulator”, and tariff barriers seem to be threatened by the Trump administration. Incoherent aspects of the new immigration policy appear to morph into crude anti-foreigner rhetoric, totally at odds with traditional American hospitality.

Canada is almost as large a destination for Chinese tourism as the US, but this a markedly different market. Apart from the liberal attitude of the Canadian government, the west coast of Canada has a very substantial Chinese population and strong economic links both with Hong Kong and the PRC.

Moreover, the Chinese are champion shoppers, snapping up quality goods at at least 20% below domestic prices (which should raise a query about whether the renminbi really is undervalued). The snapshot of tourist spending on goods, not hotels or travel, in Japan (see graph below) shows the Chinese clearly outdoing their Asian, American and British counterparties. The ongoing privatisation of Japanese regional airports — an important element of “Abenomics”, the Japanese anti-deflation strategy — probably depends on both increasing volumes of Chinese visitors and their propensity to spend in airport shops.

There are also demographic and social changes in process. The traditional impression of Chinese tourist is of coachloads of middle-aged/slightly elderly people being shuffled from historic site to shopping mall. But already two thirds of outbound travellers are millennials (15-35 years old). This cohort, according to travel surveys, is more interested in “fun” — sports, eating out, staying in the same place for enough time to relax, and repeat visits to attractive resorts. 28% of the “urban middle” possess a passport. In other words, the Chinese tourist is becoming more like his Western equivalent.

Goldman focuses on the 74m of Chinese who will graduate from college over the next ten years as being the core driver of Chinese tourism, seeing them as being internationally minded and relatively sophisticated in their leisure tastes. The size of the total outbound market in financial terms depends on GDP growth and probably more importantly on demographic/social evolution, but the minimum estimate is $450bn by 2025. Then there is the inbound tourism market — in volume terms roughly as large as the outbound market and potentially larger in financial terms.

Total 120 220 83%
2015 2025 Change
Hong Kong/Macau 68.0 86.4 27%
Taiwan (RoC) 4.1 9.2 124%
S. Korea 5.9 14.1 139%
Japan 5.0 16.0 220%
ASEAN 12.0 35.0 192%
Australia 1.0 2.0 100%
Europe 10.0 22.5 125%
US 2.2 5.0 127%
Other 11.8 29.8 153%

Source: Goldman Sachs

SHOPPING SPEND PER TOURIST IN JAPAN Produced by GNUPLOT 5.0 patchlevel 5 0 50 100 150 200 Chinese Taiwanese Thai American British Korean Average 000¥ Yen000 Yen000 160 60 44 36 25 23 82

Source: Japan Tourism Agency 2015

CHINESE OUTBOUND TOURISM Produced by GNUPLOT 5.0 patchlevel 5 0 50 100 150 200 250 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2025F millions Passport Destinations Hong Kong/Macau Passport Destinations Hong Kong/Macau

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