3 reasons why China’s outbound tourist growth may slow

 

The article says that there are concerns about the overall outbound tourism market from China, and suggests that it is increasingly likely that the biggest drivers of outbound tourism—China’s burgeoning middle class—will become less able to budget for travel in the future. Mason Hinsdale, editor at Jing Travel, explains the three reasons:

1. The Trade War and the Yuan

Nowhere is the impact of the trade war on tourism more apparent than the continued depreciation of the yuan. Some experts even believe that the yuan is now "Asia’s weakest currency". The exchange rate for US dollars to Chinese yuan (RMB) was 6.92, as of October 16. This isn’t astronomically high, but the rapid nature of the yuan’s depreciation is perhaps the travel market’s biggest cause of concern. The yuan depreciated from around 6.3 to the dollar to 6.9 between August 2015 and December 2016. The current depreciation trend has made a similar drop in value, but over the course of a shorter six months.

The depreciation since the yuan’s recent peak in April 2018 at around 6.3 to the dollar represents a value drop of around 9%. This means that when Chinese tourists go abroad, they have 9% less buying power. This isn’t spread evenly across the board and for European destinations the yuan has not experienced as much of a drop compared to the Euro, falling only by about 3.75% over that same period.

The US trade war is the biggest factor behind the yuan’s decline this year, although it seems unlikely that the People’s Bank of China, the country’s central bank, is devaluing the currency simply to make a political point. It doesn’t hurt, of course, in boosting exports, which posted strong growth in September. Even if a weak yuan is helping China survive the trade war, most analysts do not believe the Chinese government will let it go into a full slide or breach the 7 yuan to the dollar mark this year. The fall of the yuan has more to do with overall trade war pressure and a stronger dollar and less to do with official monetary policy.

2. Debt

Overall, the biggest threat to tourism isn’t a weakened yuan—it’s rising household debt. For many Chinese consumers, owning property is the only viable investment opportunity, even though the Chinese government has attempted to shore up the country’s stock markets with continued mixed results. Intense interest in home-buying among Chinese consumers has led to house prices ballooning faster than the increase in real wages, meaning that many Chinese consumers are building up debt. The ratio of household debt to GDP reached a record high of 49.1% last year, an increase of 20 percentage points over the past five years.

While there is no guarantee that this debt will lead to economic catastrophe, it should at least slow down spending growth as Chinese consumers grapple with debt repayments. To make matters worse, real estate prices have actually seen a major decline in some cities this year, with some current homeowners even protesting discounts and price cuts from property developers for new homes. With property accounting for 70% of the average urban family’s assets, major declines in property prices are devastating, especially when outstanding debt continues to accrue interest.

3. Bills, Bills, Bills

It’s not just mortgages that are putting pressure on China’s middle class. One key gauge of prices, the consumer price index (CPI), is rising slightly faster than analysts initially expected this year. It’s not a crisis in and of itself, but it doesn’t help Chinese tourists when budgeting for travel. Rent is still a particularly big burden for China’s urban middle class (or those attempting to vault into the middle class). Prices for other key goods and services, such as healthcare and education, are also rising. Meanwhile, the growth of the median disposable income in Chinese households continues to slow. In the first half of 2018, median disposable income grew by an impressive 8.4% (but it grew by 13.7% in the first half of 2014).

All of these factors indicate that while growth in outbound travel will continue, that growth will likely slow down going forward.

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