Outbound tourism from China drives sector growth in Indonesia and across Asia Pacific

Over the course of less than two decades, China has gone from being a minor player to being the world’s largest and most lucrative source of outbound tourists. In 2017 alone Chinese nationals made more than 131m trips outside of their national borders, spending approximately $300bn in the process.

The growing volume and financial clout of Chinese tourists presents considerable opportunities – while simultaneously posing new challenges – for hoteliers, tour group operators, retailers and national governments. While swelling numbers of Chinese visitors have already acted as a major growth engine throughout Asia Pacific, less than 10% of the population currently holds a passport, meaning the rise of the Chinese tourist is a trend still in its relative infancy. With the China Outbound Tourism Research Institute (COTRI) projecting upwards of 400m overseas trips by 2030, China’s booming outbound sector will continue to dynamically reshape the industry, both around the region and further afield, in the decade ahead.

Minnow to Mammoth

From the foundation of the People’s Republic of China (PRC) in 1949 up until 1978, the vast majority of Chinese citizens were effectively sealed off from the outside world. This began to change in the 1980s, when the development of outbound tourism occurred in tandem with a series of economic and political liberalisations spearheaded by Chinese leader Deng Xiaoping. In this early stage of “reform and opening-up”, travel abroad was almost exclusively limited to family visits, business trips and cultural exchanges centred on the broader Sinosphere of Hong Kong, Macao, Malaysia, Singapore and Taiwan.

One of the major catalysts for growth was the Approved Destination Status (ADS) programme. Launched in 1995, the ADS programme paved the way for travel agencies to begin offering organised group tours to a number of government-approved destinations. Throughout the late 1990s the Chinese government took a number of additional steps enabling rapid, significant growth in the industry: reducing restrictions on attaining a PRC passport, increasing the amount of foreign currency Chinese citizens were allowed to purchase, implementing a five-day working week and introducing “golden weeks” offering seven days of national holiday time.

China’s 2001 accession into the World Trade Organisation served as the precursor to an eight-year period of substantial economic growth, rising living standards and increasing integration with the global economy. During this time the formation of an urbanised middle class – with fewer restrictions on movement, greater awareness of the outside world and higher levels of disposable income – propelled the country’s emergence as a major force within the global tourism industry. From 2001 to 2008 the number of Chinese trips abroad rocketed from 10.3m to 43.8m annually, according to COTRI data. A robust rebound from the 2008 global financial crisis, which saw a quick resumption of double-digit growth rates, was mirrored within the tourism industry, where China overtook the US as the world’s largest outbound market in 2014.

Profile of the Chinese Tourist

Today, Chinese nationals are the dominant outbound demographic in both eastern and southern Asia. With two-thirds of overseas trips concentrated in the region, Chinese tourists play a major role in sustaining the sector – from South Korea and Japan, to Singapore, Sri Lanka, Thailand and the Philippines. While Chinese and non-Chinese travellers alike place substantial value on the beauty, uniqueness and safety of potential destinations, Chinese tourists abroad distinguish themselves from their counterparts along a number of lines.

Leisure activities – eating, shopping and sightseeing – represent the overarching priority for Chinese abroad. According to survey data compiled by Nielsen, Chinese tourists prioritise “experience” over “cost” and exhibit substantially higher levels of purchasing power than non-Chinese travellers. The rising financial clout of the Chinese consumer is on full display in the retail sector, where they spend 37% more on shopping abroad than other nationalities. In 2018 it is estimated that Chinese outbound tourists averaged $5715 in overall travel expenditure. In terms of on-location expenditure, Chinese travellers spent the most in longhaul destinations such as the US ($4462) and Australia ($3541). By contrast, the average on-location spend by Chinese travellers to Thailand was $2026.

Although travel patterns continue to evolve, Chinese tourists also differ in terms of their preferred method of travel; when going abroad, the majority opt for organised group tours over family and individual travel. While group packages remain the norm, interest in customised travel options and personalised guided tours has grown substantially in recent years. Outbound travel is also a disproportionately young and female phenomenon; data from tour operator Ctrip indicates that in 2019, 59% of all outbound Chinese travellers will be female, with those born in the 1970s and 1980s making up the dominant age demographic.

Unlike their non-Chinese contemporaries, Chinese tourists are less price-sensitive when planning trips overseas. However, one major point of concern for Chinese travellers concerns the relative weakness of the PRC passport; according to rankings from Passport Index, China scores poorly in comparison to many regional counterparts on its total visa-free score, in 75th position. This added layer of complication makes the ease of the visa application process a potentially significant factor when planning overseas travel. National governments that strip away cumbersome entry restrictions will therefore be best positioned to benefit from the Chinese outbound phenomenon.

Embracing China Outbound

The growing weight of China’s outbound sector presents myriad opportunities for businesses and governments alike — encompassing both well-established destinations and frontier economies still in the process of building up the tourism infrastructure necessary to accommodate an influx of overseas visitors. With President Xi Jinping more assertively pushing China’s global outreach, national and regional governments that bring their development strategies into alignment with Beijing’s broader economic and geopolitical ambitions will be well placed to attract a greater share of the growing outbound market. This is particularly the case in lesser-known or underdeveloped tourism markets, where Chinese-backed infrastructure projects, frequently carried out under the umbrella of the Belt and Road Initiative (BRI), have brought with them an uptick in Chinese arrivals, particularly business travel.

China’s increasingly vibrant and sophisticated consumer culture is being moulded by information and communications technologies that are fundamentally reshaping how consumers work, live, socialise and travel. Given the ubiquity of mobile payment platforms within Chinese society, tourists naturally gravitate towards these options when overseas. In recent years mobile payment has rapidly converged with cash as the preferred medium of exchange, particularly for shopping, dining and sightseeing. Vendors offering mobile payment options – widely seen as a safer and more convenient alternative to cash – are increasingly at an advantage in winning over Chinese shoppers. According to Nielsen, 65% of Chinese tourists currently use mobile payment when travelling abroad, where, in contrast to their non-Chinese peers, the method of payment factors heavily into spending decisions.

ASEAN Imprint

Around Southeast Asia, China’s growing presence is arguably being felt more acutely than any other region in the world. Cultural and linguistic familiarity, coupled with lower travel costs and geographic proximity, helps explain the popularity of the region among Chinese travellers. In Thailand, where the tourism industry accounts for over 20% of GDP, Chinese have rapidly supplanted other nationalities as the largest group of foreign visitors. In 2017 roughly 9.8m Chinese – representing 25% of overseas visitors – entered Thailand, up from 2.7m in 2012.

As tourism arrivals continue to rise, the Thai government is hoping to further develop the sector by shedding its reputation as a budget travel hub and catering to an upscale, niche segment of the international market, while investing in the development of traditionally overlooked areas. China’s increasingly diverse and urban tourism profile will play an essential role in furthering Thailand’s development ambitions. An emphasis on promoting Buddhist-oriented travel packages, medical tourism, destination weddings, luxury shopping and fine-dining experiences aligns with the needs and expectations of high-value segments of the Chinese outbound demographic.

The number of Chinese heading for the Indonesian archipelago has also grown exponentially in recent years, multiplying 16-fold over the past decade to overtake Singapore as the largest source of foreign travellers in 2017. With plans for Indonesia’s tourism sector to comprise 20% of the economy and draw in over 20m visitors by 2020, attracting a greater share of China’s rapidly growing middle class is vital to Indonesia’s ambitions for further development.

Investment Role

During a May 2018 meeting with Chinese counterpart Li Keqiang, Jusuf Kalla, the vice-president of Indonesia, expressed his goal of attracting upwards of 5m Chinese tourists by the end of the decade. Indonesia is currently seeking $20bn in foreign investment, with a substantial portion expected to come from China’s BRI, to aid in the development of 10 tourist sites that can serve as popular alternatives to the saturated Bali market. Increasing airline connectivity between China and Indonesia, coupled with government efforts to improve Mandarin training for local tour guides, will play a key role in cultivating the Chinese demographic.

Warming government-to-government relations between Beijing and Manila under the administration of the Philippines’ President Rodrigo Duterte have also redounded to the benefit of the country’s tourism and hospitality sector, which, over the past decade, has become increasingly dependent on Chinese visitors as a major industry driver. In 2017 China overtook the US to become the second-largest source market for the Philippines’ tourist industry, with Chinese arrivals multiplying 43% year-on-year to reach 968,000.

Chinese tourism is playing an increasingly vital role in Myanmar, where, on October 1, 2018, the Central Committee for the Development of the National Tourism Industry implemented visas on arrival for Chinese visitors alongside travellers from other key Asian source markets such as Japan and South Korea. While the sector grew substantially following a series of political and economic reforms in 2011, Myanmar currently faces international criticism over ongoing unrest in Rakhine State and has seen a significant reduction in the volume of Western visitors over the past year. The drop-off in interest from North American and European tourists is fuelling a heavier reliance on Chinese and other visitors from Asia to compensate for the shortfall, with Thailand, China and Japan the top-three source markets in 2017.

Further Afield

The increasing dynamism of China’s outbound tourist market extends well beyond the borders of East Asia. In the South-Pacific region, Papua New Guinea (PNG) has seen an uptick in Chinese visitors coinciding with a period of sustained commercial and diplomatic engagement with Beijing. In 2017 Chinese investment in PNG, calibrated towards the latter’s substantial energy and mineral resources, totalled approximately $2bn, and the island nation signed onto Beijing’s linchpin BRI in June 2018.

Against this backdrop, Chinese tourists are following the flow of investment in PNG’s infrastructure and natural resources. While the Chinese source market plays a limited role in PNG’s broader tourism industry – as it remains a destination primarily for business executives and government officials – the government has taken a number of steps to capture Chinese leisure travellers. In recent years the PNG authorities have ramped up tourism-promotion efforts at trade and tourism events around China, and developed relationships with Chinese tour group operators. Like Myanmar, PNG recently pared back entry restrictions on Chinese nationals by offering visas on arrival.

In Sri Lanka, another strategically located island nation, tourism is an increasingly integral component of the overall economy, and China is playing a central role in driving growth there as well. From 2010 to 2016 the number of Chinese visiting Sri Lanka grew by 72.5%, significantly outpacing all other countries to surpass the UK as the second-largest source country for foreign visitors behind India. The rapid increase in Chinese visitors coincided with Sri Lanka’s efforts to capitalise on the end of its decades-long civil war by accelerating nationwide infrastructure development and improving its image as a desirable destination for investment, business and tourism.

This effort resulted in the development of a number of China-backed infrastructure projects, including the controversial Hambantota Port and nearby Mattala Rajapaksa International Airport, which have both operated below capacity since opening. In 2017 the Sri Lankan government agreed a debt-for-equity swap that saw Chinese interests acquire an 85% stake in the port on a 99-year lease. Although some see Hambantota Port as a symbol of the dangers of over-reliance on China for finance and investment, the influx of Chinese business and leisure travellers creates new opportunities in the tourism and hospitality sector. While the number of Chinese visitors pales in comparison to more established locations around East Asia, the significant pipeline of China-backed infrastructure and real estate projects in Sri Lanka, combined with astute marketing initiatives focusing on the Chinese demographic, have already started to have a strong impact on the country’s burgeoning tourism industry.

“The emergence of Chinese tourism comes with both positive aspects and some challenges. On the one hand, Chinese tour operators are monopolising certain aspects of the value chain by buying their own buses, bringing in their own guides, and opening their own shops and restaurants. This allows them to create packages they can ultimately sell for below-market rates in China,” Hiran Cooray, chairman of Jetwing Hotels, told OBG. “This does not give local players a chance to compete and creates few trickle-down effects within our local communities. On the other hand, if we can tap into the higher-end segment, the potential is there to drive growth across the industry.”

Risks & Rewards

China’s ascent to global superpower status – denoted by its rapidly expanding commercial, cultural and geopolitical footprint throughout Asia – raises certain complications for stakeholders hoping to benefit from the country’s international push. One major concern stems from a lack of diversification: ever-greater reliance on the Chinese source market presents potentially severe downside risk in the event of either a serious slowdown within China’s economy or a diplomatic dust-up between Beijing and any number of regional capitals. Beijing’s ability to control tourist outflows by influencing tour group operators allows it to use tourism to exert political pressure. South Korea’s 2017 announcement that it was deploying a THAAD missile defence system and Taiwan’s 2016 election of President Tsai Ing-wen from the traditionally independence-leaning Democratic Progressive Party both resulted in a steep decline in the overall volume of Chinese visitors.

Moreover, in some locales the sudden influx of Chinese tourists is eliciting a growing domestic backlash. This sentiment is often expressed through concerns regarding over-tourism, excessive development, and rising property, rental and retail costs. In certain instances, increasing reliance on Chinese investment dovetails with public anger over government corruption and co-optation, as well as fears of a potential loss of economic sovereignty. Governments and private stakeholders must try to balance catering to China’s ascendant urban middle class with concerns over sustainable and diversified growth. Going forward, markets will strive to harness the benefits of China’s growing centrality in the tourism and retail space without compromising national sovereignty or alienating local populations through overdevelopment.