The Rise of Chinese Tourism

Published in Plataforma Macau (Portuguese & Chinese version) - By Marco Rizzolio -  18 March 2016

2015 was a good year for Chinese outbound tourism. The Chinese per-capita GDP and the appetite for travel continued to grow. There was significant increase in outbound: 120 million Chinese tourists have  traveled overseas in 2015, with almost 67 million traveling to Hong Kong/Macau, around 5 million to Japan, Korea, and Taiwan, 12 million to ASEAN, and 2 million to the US.

Hong Kong and Macau account for half of China Outbound tourism. Honk Kong had 59 Million visitors in 2015 with 78% coming from mainland, representing 46 million Chinese. Macau had a total of 30 Million visitors, with 67% coming from Mainland representing 20 Million of Chinese. In 2015, the total Chinese outbound travel represents less than 10% of the 1.3 billion population. 

Source CLSA:  Hong Kong and Macau have long been the top destinations for mainland Chinese going abroad. Macau & HK will have to quickly adapt to follow the trend.

The margin for growth is huge, and China’s outbound tourism is set to bloom over the next 10 years and leave its mark on a wider range of destinations. Analysts are forecasting that the number of Chinese residents who will travel overseas will nearly double to 220 million by 2025, up from 120 million this year.  If we exclude Hong Kong and Macau, Chinese tourist numbers could increase x2.5 times to 130 million in 2025. 

The actual economic slowdown in China should not have major impact. The number of Chinese passport holders is forecast to expand by 100 million over the decade, fueled by experience-hungry millennials and a growing middle class. 

Looking ahead, the trend of Chinese outbound tourist growth should continue, and almost double by 2025, given:  (1) the Chinese passport ownership ratio is only 4%, (2) middle-class income is rising and households are spending more on having fun, and (3) millennials are not adverse to foreign travel. 

1. Only 4% of Chinese people hold a passport (55 million passport holders), far lower than 25% of Japanese and 35% of Americans, Australia 50%, Canada 60%, 80% UK. Analysts forecast that the number of passports will increase at the current run rate of roughly 10 million per year until 2025. It is expected that the number of Chinese passports will almost triple from 55 million (2014) to 150 million in 2025 , representing 12% ownership rate, versus an estimated 25% increase in the number of passports globally. Overseas travel has a higher correlation with passport growth than the economy and the number of people traveling overseas has risen along with a rise in the passport ownership rate.  It is predicted that around 40% of China's urban middle + mass cohort will hold passport in 2025 Passport ownership rate with “urban mass” and “urban middle” as the Denominator. 
2. A change in tourism demographics and habits is another point to watch. Two thirds of current outbound travelers are young millennials (70% of outbound tourists): generation born between the 1980 and 2000 that are 15-35 years old. It’s predicted that 74 M of travel-ready millennials will graduate from Chinese universities in the next 10 years and this will further boost passport ownership. They will be the key driver for the projected 100 million increase in Chinese passport holders in 2025. These Millenials will have more opportunities to travel overseas before and after university. This generation is well informed, familiar with the internet, has access to overseas information, has usually studied a foreign language, and is not averse to overseas travel. 
3. A growing middle-class population with higher incomes and a willingness to travel overseas; increased spending on having fun

• The per-capita GDP growth will be accompanied by an increase in the urban middle-class population who will have the income to afford overseas travel. As incomes rise, it’s expected they will be upgrading from domestic travel and expanding their travel horizons from Hong Kong and Macau, to other Asian destinations, and later to Europe and the US.
• The percentage of household income devoted to leisure activities in China and many other Asian countries is low compared with Japan, Europe, and the US. In absolute terms, average annual per-capita expenditure on travel in China is less than 10% of the amount spent in Japan, the US, and Korea. More households are expected to travel as they spend more on leisure activities. Some analysts are predicting that Chinese tourists will spend the amount of US $450 bn on travel overseas in 2025 , an increase of US$250 bn from today’s figures. In 2015, Chinese tourists spent US $200 bn on travel, from which roughly US$60 bn on shopping overseas. This figure will be doubling to US$130 bn by 2025, in line with the growth in tourist numbers.

Source Nikkei Asias Review:

Key Factors when travelling 

Multiple factors are taking in account by Chinese travelers such as the relatively short travel distance from China, price differentials, relaxing visa conditions, and tourism assets. 

? Distance: Many Asian countries are just a three to four hour flight from China, much closer than European and North American countries. However, many countries require visas for travel from China, making them seem even further away.

? Relaxation of visas: The main challenges they face traveling overseas are related to visa applications, being the greatest impediment to overseas travel. A number of key countries have already relaxed visa requirements for Chinese tourists over the past 2 years, which could help boost tourist numbers. The addressable market of Chinese tourists to Japan has increased to 50 million Chinese residents in few years, from 10 million following a visa change in January 2015. No doubts that the relaxation of visa scheme has direct impact in outbound tourism and is becoming an increasingly important driver of tourism, as millennial travelers crave fun.

?Having fun: The young millennial customer (2/3of  outbound travelers) is more prone to experience based consumption, which has resulted in a surge in “fun related” consumer spending. Fun related spending includes travel, eating out, sports, media, and online gaming – all of these segments have held up well despite softer economic growth. “Fun” related spending is under-indexed in China, at 9% of per capita expenditure vs 16-17% in the US and Japan. Fun spending activities has the largest potential for growth.

?Shopping: Shopping will be one of the key drivers for Chinese tourists when selecting travel destinations. In 2015 Chinese tourists spent US$200 bn in overseas spending and 30% was on shopping. Offering cheaper goods is key factor for tourists. In short, prices in China are too high, especially for consumer goods relative to other destinations. Chinese goods for international brands are on average 20-30% higher than the tourist destinations. In the long term, tourist motivation will gradually shift away from “shopping for cheap goods” to “having more fun. 

Source Chart Below (Goldman Sachs Global Investment Research)

Nearly half of consumers’ incomes goes to clothes and food

“Fun” has the largest potential for growth.

Surge of other destinations 

Hong Kong and Macau have historically been the easiest markets to access for Chinese tourists. Over half of China’s outbound tourists travel to HK/Macau. While they will remain important destinations, the surge will lead to dramatic increases in visitors to destination across Asia, Europe and beyond. Looking ahead, it is expected incremental pressure on Hong Kong/Macau as other “second mover” markets will offer incremental middle class tourist new travel destinations to explore.

While most tourists will continue to visit Hong Kong/Macau, it is expected that the strongest visitor growth in Asia will be to Japan and Korea. Japan is the most appealing destination for Chinese tourists but Korea still has room to increase - having the second highest number of world heritage sites in Asia, abundant cultural assets, is only a three hour flight from mainland China, and has relatively cheap product prices.

On the other hand, Korea has a relative advantage over Japan in terms of: 1) shorter flight time (less than 2 hours) is half Japan’s, and there are many cruise lines, making Korea an appealing destination for weekend or shorter stay vacations. 2) more relaxed visa policy compared to Japan Visa. Chinese tourists do not need a visa to visit Jeju island (and from this year will not need a visa to visit mainland Korea if they have plans to transit to Jeju after the stay). While visa relaxation in Japan is ongoing, Chinese tourists still face a complex visa application process, which involves the preparation of several documents and takes a few weeks. . Travel to Europe, US and Australia is also expected to grow significantly.

Recent visa relaxation has increased the “power” of the Chinese passport. In the near future, the ease of obtaining a visa, along with attractive pricing, are two of the key reasons why tourist numbers have and are likely to continue to rise.

Marco Duarte Rizzolio

Managing Partner Follow Me Macau Ltd