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The Impact of the Chinese Downturn on the Travel Industry

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The Chinese economy is feeling the effects of a falling stock market, as investors are moving away, commodity prices are tumbling and the government has taken the decision to devalue the yuan. It is difficult to predict how the situation will develop in the future, but information is starting to trickle in about the impact this is having on the travel industry. It seems unlikely that the current developments on the stock market will be able to dampen the astronomical growth of outbound travel registered in the past years, although more discreet changes in behaviour are likely.

Current state of Chinese outbound travel

Since 2012, when it overtook the US and Germany, China has been the country with the highest outbound expenditure in the world. Hong Kong and Macau are by far the most popular destinations for Chinese residents, although these trips have been under pressure recently.

Chinese authorities have started to clamp down on some of the illegal activities associated with the gambling industry in Macau, which has impacted the travel of rich Chinese tourists to the area. Furthermore, recent protests from Hong Kong locals, demanding more autonomy from the Chinese government and against Chinese shoppers emptying the shelves of local shops to benefit from VAT discounts, has reportedly resulted in a slump in Chinese tourists visiting Hong Kong in the first half of 2015. With the Chinese government censoring most of these protests, however, it is likely that stricter rules for one-day visas have also contributed to a decline in one-day shoppers crossing the border to Hong Kong.

As a result, data from tour agencies suggest a decline of 20% in hotel stays in Hong Kong, while the UNWTO data showed a 5% and 6% decline in arrivals to Hong Kong and Macau, respectively, in the first half of 2015. Other Asian destinations such as South Korea, Japan and Thailand have benefited from the declining popularity of Macau and Hong Kong, as well as from increasing disposable incomes and Chinese travellers becoming more adventurous as their travel frequency increases. This has also benefited the growth of Chinese travellers visiting Europe, with particularly Schengen countries proving popular destinations. The UK appears to be falling behind, as a Schengen visa is lower priced and allows access to all 26 Schengen countries, compared to a UK visa.

Top 10 and Selected Destinations of Chinese Outbound Visitors 2014 and CAGR 2009-2014

Ranking Destination Outbound trips ('000s) CAGR 2009-2014
1 Hong Kong 18,724.8 14.1%
2 Macau 7,885.2 14.8%
3 South Korea 5,230.2 31.3%
4 Thailand 4,433.7 40.3%
5 Taiwan 3,506.6 32.5%
6 US 2,026.5 31.0%
7 Malaysia 1,975.4 14.2%
8 France 1,771.7 19.2%
9 Japan 1,756.9 11.8%
10 Singapore 1,722.4 13.0%
12 Russia 1,002.2 10.2%
13 Germany 950.4 20.0%
15 Australia 792.0 17.3%
16 Switzerland 753.1 32.1%
20 Spain 407.5 15.6%
21 Canada 379.8 18.8%
28 UK 214.9 19.2%

Source: Euromonitor International from UNWTO

Impact on spending power

It is largely impossible to know at this moment what the downturn of the Chinese stock market will mean for Chinese outbound travel. As is always the case with the travel industry, the situation is more nuanced and not just influenced by one factor. A prime example of this is the recent lull in Chinese visitors to France and Thailand - normally very popular destinations - due to the Charlie Hebdo attack in Paris and the shrine attack in Bangkok. Travel is a turbulent, but also resilient industry, and this is especially true for China, where disposable incomes are quickly growing.

According to GaveKal, a financial services company, the downturn is expected to only impact around 20-30 million Chinese households, mainly the upper middle class and very wealthy, with large sums of money invested in the stock market. As the strong growth in Chinese tourism seen in recent years has come predominantly from the middle classes, it is unlikely that a major decline in outbound travel is around the corner. When comparing China with its fellow BRIC countries and MINT countries, it is evident that household incomes will grow strongly and outperform other countries over the coming decade, as more and more households reach a disposable income level of US$35,000, which Euromonitor International estimates is the threshold for international travel.

Households with Disposable Income over US$35,000 in MINT and BRIC Countries 2010-2030


Source: Euromonitor International

Impact on the travel industry

Chinese tourism, then, is set for strong growth in the coming years, and it is unlikely that the economic downturn will have a significant impact on this. Business travel will be hardest hit. The management of Chinese hotel chain Homeinns Hotel and Management Inc acknowledged during the company’s Q2 earnings call that it is feeling the impact of the economic slowdown in its domestic business stays. This will, however, mainly impact domestic travel as of the nearly one billion business trips made in 2014 by Chinese residents, only 2% were international. In comparison, leisure travel is expected to maintain flourishing growth, as leisure travel is becoming the “norm” for Chinese families. This is boosted by better infrastructure in second- and third-tier cities, with added flight capacity to international destinations, 82 new airports by the end of 2015, and better high-speed rail links to and between airports.

The impact of a weakening economy will not stop Chinese consumers from travelling, but it might change the destinations they choose and their in-destination spending. Short haul destinations such as Japan, South Korea and Thailand are expected to reap the benefits, while destinations further afield in Europe and North America might suffer from declining arrivals. Chinese consumers are expected to downgrade on hotels, as travellers become more conscious of their spending options. Shopping, and particularly luxury shopping, is also likely to be affected, which will be felt most particularly in European cities such as Paris, Geneva, Milan, Amsterdam and London.

Future developments

While the stock market volatility is not a reason for panic, it does provide a reminder of the Chinese government’s desire to control and intervene. The current developments could end the financial opening up of Chinese market, which would result in even more difficult times for Western companies entering the Chinese market. With private rental players such as Airbnb and HomeAway just starting to discover China’s potential, this might lead to some extra hurdles for these players. HomeAway’s VP of Asia Pacific, Dan Lynn, remains positive nonetheless and believes that demand will continue to drive the segment forward, noting that “China’s economy will likely go through numerous adjustments over the coming years, but what we see in China is continued growth of people with the means and desire to travel. In China, we may see more people choose vacation rentals instead of relatively overpriced hotels.”

It is difficult to argue with this view. In a country where only 3% of the population has a passport, and with a government actively promoting tourism through a recently launched 2.5-day-weekend campaign, it is unlikely that an economic slowdown will result in a decline in outbound and domestic tourism. However, the current slowdown might lead to lasting changes in spending behaviour. The challenge for the travel industry is to remain on top of these changing consumer demands.

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