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China outbound travel demand towards 2030 – what and where are the opportunities?
Thursday, 25th November 2021
Source : Dan Voellm, MRICS

Rapid growth in Chinese outbound travel demand from 2003 onwards was a key driver for tourism and leisure hospitality in many parts of the world, but can this momentum be regained post-COVID to drive more hotel development?.

The hospitality industry is keenly looking forward to the return of tourist arrivals. Given that the largest source of outbound tourists being from China, the prospects for a recovery and medium-term growth are critical.

In an earlier article (A potential recovery in China outbound travel demand OR what’s in store for 2022?). we discussed the short-term outlook for five key destinations.

This article discussed outbound travel growth prospects, including key drivers the impact on hotel demand and opportunities for new destinations to emerge.

‍Track record check: China outbound travel demand

The number of Chinese outbound travelers expanded considerably over the past two decades, and China was also the largest contributor to the global tourism industry by expenditures before COVID-19 emerged in early 2020.

Mainland China outbound trips 2000-2019

Source: National Bureau of Statistics of China

Statistics released by the National Bureau of Statistics of China (NBS) revealed that the total number of outbound trips grew steadily from 57.4 million in 2010 to 169 million in 2019. While the NBS does not publish data for 2020, the China Tourism Academy (CTA) estimates the number of outbound trips dropped to 20.2 million in 2020 due to COVID-19.

A similar crisis, the SARS epidemic in 2003, however, did not cause a similarly severe impact on Chinese outbound travelers at that time. The comparable figure reached 20.2million in 2003 with a 22% growth over the previous year given a much shorter duration limited to several months, rather than years.

Total outbound trips reached 169 million in2019 at a 4% year-on-year growth. Trips to Asia accounted for more than 90% of the outbound trips, of which Greater China (“GC”), including Hong Kong SAR, Macau SAR, and Taiwan made up approximately 60% of the total or 100 million trips in2019. We caution that this figure includes a large number of same-day visitors, including commuters, school children, shoppers and some tourists. For Hong Kong SAR this figure can be as high as 63% in 2019 and 53% in Macau SAR in 2019.

Mainland China visitor arrivals to GC 2010-2020

Source: Hong Kong Tourism Board; Statistics and Census Service of Macau SAR; Taiwan Tourism Bureau

Data on mainland Chinese visitor arrivals provided by the respective destinations’ authorities (Hong Kong Tourism Board; Statistics and Census Service of Macau SAR; Taiwan Tourism Bureau) indicate that Hong Kong was the most popular destination within Greater China in 2019,despite a slight decrease from 2018 due to an unstable environment.

Macau, on the other hand, attracted Chinese travelers with its gaming and other attractions at stable growth rate over the past years. At the same time, destinations outside Greater China enjoyed increasing popularity among Chinese visitors, counting more than 60 million trips in 2019, the highest number on record.

Mainland Chinese Visitor Arrivals to Asia, ex-GC, 2019

Source: Corresponding Destination Tourism Authorities

Owing to their proximity Asian destinations welcomed the second-largest number of outbound Chinese tourists Ease of access favors short-to-medium-haul flights within a 3-to-5-hour flight radius for both convenience and cost. Notably, the limited number of vacation days available to Chinese workers also favors shorter flights. As reported by China Tourism Academy (CTA), Japan, South Korea and Southeast Asia were the top destinations outside Greater China in 2019. Excluding Greater China, top three Asian countries, Thailand, Japan, and Korea, accounted for more than half outbound trips in Asia in 2019.

In 2019, mature long-haul destinations captured a great share of Chinese outbound travel outside Asia, including close to 18 million trips to Europe and over 3.5 million trips to North America. Other key markets, such as Russia, Australia, and UAE, also attracted more than one million visitors from mainland China in the same year.

Mainland Chinese Visitor Arrivals to key long-haul markets, 2019

Source: Destination Canada; Dubai Tourism; Stats NZ, Russia Tourism; Tourism Australia; European Travel Commission

The near future

Although Chinese travelers turned to domestic travel during the pandemic, the number of outbound trips is set to rebound as borders reopen. While the country has a large and growing middle-class population willing to spend, the pace of recovery is dependent on the country’s progress regarding vaccinations, government policy, and travelers’ perceived risk of different overseas destinations.

More than 75% of the Chinese population is fully vaccinated, and major cities, such as Beijing and Shanghai, already achieved an 85% vaccination rate in August 2021. Nevertheless, experts in China suggested that the country would only consider reopening its border at a minimum nation-wide vaccination rate of 80% to 85%. Meanwhile, the country maintains strict border controls to prevent any import of infections; inter-provincial and inter-city travels do get be suspended when regional outbreaks happen domestically.

Unfortunately, government officials have yet to unveil any reopening plans, and the zero-tolerance policy is set to remain in place for a longer time. It is speculated that the border would remain shut for the coming year given the lead-up to the National Congress of the Chinese Communist Party in November 2022 – likely the most important political event in China since 1989.

The Winter Olympics Games 2022 in Beijing are likely to only welcome a domestic audience complying with COVID-19 prevention measures, although vaccinated participants can enter without quarantine while remaining in an Olympic bubble. At the same time, efforts are being made to reopen the border between Hong Kong SAR and the mainland.

Reportedly with a very limited quote of 1,000 daily arrivals from Hong Kong SAR, which adheres to a strict zero-tolerance policy of its own, starting towards the end of the year. According to the South China Morning Post, a full opening of the border could happen before June 2022 to resemble the condition at the Macau border. The mandatory three-week quarantine imposed on all inbound and returning travelers undoubtedly stymies Chinese outbound tourism demand.

Furthermore, the cost, perceived risks of destinations (regarding COVID-19), and ease of visa application are other key considerations among Chinese travelers for any future outbound trips. While more countries are welcoming tourists back, especially from low-risk countries like China, the unpredictable COVID-19 situation and border control measures in China pose insurmountable difficulties to bring Chinese tourists back in the short term. To the detriment of many industry stakeholders, the government does not see a great benefit in reopening borders for inbound travelers while domestic travelers are willing to spend on holidays within the country, propping up the economy for the time being.

Travel demand drivers

The three main segments of travel demand (business, leisure, MICE) are largely dependent on two drivers: economic performance (for all three) and the size of the population with sufficient disposable income(for leisure). China’s outbound travel demand is dominated by the leisure segment. In the modern age, the majority of higher-spending outbound leisure travelers can be found residing in urban areas.

China’s urbanization rate increased over the past decade

Source: National Bureau of Statistics of China

Since 2011, the urban population increased significantly from 51.8% to 63.8% in 2020 growing at a rate of approximately 3.0% per year before slowing down from 2018 onwards. While the pace of urbanization is slowing, projections by Morgan Stanley target an urbanization ratio of 75% by 2030. This change in the composition of the population will see not only greater demand for goods but also services and ultimately outbound travel. According to the EIU, population changes will further be impacted by a degree of migration back from coastal areas to central and western provinces, where manufacturing costs are lower.

Urban population by city cluster (m)

Population changes are additional drivers of urbanization that will impact economic development. Western and central provinces with higher population growth rates are set to close the development gap with coastal provinces.

A host of factors in urbanized areas leads to higher disposable income, including improved social mobility, access to resources, greater talent pool and incubation of ideas. Though certainly there are downsides as well, residents in urban areas enjoy a 36% disposable income premium compared to the national average.

The 2019 annual report on Outbound Travel by the CTA also suggested that the market of Chinese outbound travel is robust in the long run due to increasing income levels in the country driven by increasing levels of urbanization and economic development.

Urban areas in eastern China would continue to lead the growth of outbound travel while coastal provinces, like Jiangsu and Guangdong have further potential to eventually outperform Beijing and Shanghai. Over time the development gap between eastern China and other provinces is set to narrow, unlocking future potential for outbound travel in the populous western provinces.

Urban areas command a disposable income premium

Source: National Bureau of Statistics of China

The disposable income of Chinese population recorded a growth rate of approximately 9.0% in pre-pandemic times, decreasing to 4.7% during the pandemic. While trailing the national level in relative terms, disposable income growth in urban areas outpaced the national level in absolute terms for all years from 2014 to 2020.

Upon closer inspection, the composition of the employment base in urban areas shows three categories: state-owned enterprises(SOEs), private companies, and others.

Urban employment by sector 2011-2019

Source: National Bureau of Statistics of China

Among a dynamic economic environment with a higher degree of privatization, private companies employed 34% of urban workers by 2019, up from 26% in 2011. In absolute terms this represents approximately 76.5 million more urban private company employees over the eight-year span.

Comparing the number of urban private company employees next to the number of outbound trips, paints a compelling picture, as show in the detail below.

Urban employment & outbound trips

Source: National Bureau of Statistics of China

Over the eight-year period from 2011 to 2019,the growth in private company employees was moderately outpaced by the number of outbound trips. While more detailed studies are required on a provincial level, it is evident that the macro-trends of urbanization, increasing disposable income among urban residents and private sector employment provide strong support for continued outbound travel demand growth in the medium-to-long term.

The road to 2030

To no surprise, the potential return of Chinese outbound travelers has been discussed before, the most aggressive of which have Chinese outbound travelers return to 2019 levels as soon as 2023. In a May 2021 update ’The road to recovery for Chinese outbound tourism’, the Economist Intelligence Unit (EIU) expected outbound travel in China would return to pre-pandemic levels in early 2024 to reach its pre-COVID-19 potential of 240 million earliest by the end of 2025.

At the beginning of the recovery, Chinese tourists would first return to Hong Kong, Macau, and Southeast Asian countries considering the vaccine rollout and risks of reopening in these destinations reported by EIU. On the other hand, the China Outbound Tourism Research Institute (COTRI) suggested that Chinese outbound tourism would surpass its record number of 180 million reached in 2019 by 2023 providing an optimistic outlook in their latest forecast from June 2021.

In turn, in September 2022 Bernstein Research projected the number of total outbound trips would surpass 200 million in 2023 and 365 million by 2030; whereby the growing number of Chinese outbound travelers would stimulate hotel room night demand accordingly.

Comparison of outbound trip projections

Source: see references

AP’s projections of outbound Chinese travel are based on performance from pre-COVID-19 years and through the pandemic. Greater China (“GC”) was separated out. According to the NBS total outbound trips taken in 2019 reached 169 million, 102 million of which were outside GC.

However, figures released by the destinations in GC only showed an aggregate 75 million Chinese inbound travelers in 2019 – a difference which could not be explained. To reconcile, the NBS’ total number of outbound trips of 169 million was adopted together with an adjusted number of trips to GC of 85 million to form the base for the projections of Chinese outbound travel in this article.

The analysis employs the ratio of outbound trips to urban population (OTUP) to project total travel demand. In addition to the base case, an optimistic and conservative scenario were developed.

Outbound trips by OTUP ratio, 2011-2030F

Source: AP Projections

Historically, the OTUP ratio (plotted on the secondary y-axis) increased from 0.10 in 2011 to 0.19 in 2019, reflecting the growth of the middle class and disposable income. While the pandemic depressed this ratio significantly, we project a robust recovery in the medium term before gradually tapering off.

In the three scenarios, the OTUP ratios reach 0.18, 0.2 and 0.25for the conservative, base and optimistic cases, respectively, by 2030. The total number of outbound trips ranges from 197.1 million to 271.2 million by2030. In the base case outbound trips arrive at 221.8 million by 2030, compared with 169 million in 2019 – a milestone projected to be surpassed in the base case come 2026.

While the projection covers a relatively wide range, a host of factors can have both positive and negative impacts. One major aspect is the continued development of the domestic tourism industry under policies promoting cultural tourism, dual circulation, and domestic consumption.

Total outbound trips projections, 2019-2030F

Source: AP Projections

The projections are further split for Greater China (GC) and ex-GC as show below.

GC trips projections, 2019-2030F

Source: AP Projections

Outbound trips to GC are projected to recover to 2019 levels in the base case by 2025. Recent changes on travel permits and changes to supply may have limiting effects on a recovery in the short-term. Hotel capacity constraints will likely be the major obstacle for increased growth on overnight stays.

Same-day visitors may well drive more outbound trips to GC, in particular for the integration areas on Hengqin Island next to Macau and the planned ‘Northern Metropolis’ at the Hong Kong -Shenzhen border. Historically, the share of same-day visitors was approximately 50% for Macau and 60% for Hong Kong.

Outbound trips projections ex-GC, 2019-2030F

Source: AP Projections

The prospects for trips ex-GC are generally promising. The ramp-up period may be slightly longer, surpassing 2019 levels only by 2026.Given that limited new supply has been added to the pipeline during the pandemic and some hotel properties were converted to alternative uses, capacity constraints may limit growth in the near term. However, the upside potential until 2030 is significant, reaching close to 150 million compared to 85 million in 2019.

The incremental number of trips to ex-GC range from 21.5 million to 65.8 million trips, with a base case at 32 million. This represents a sizeable increase in outbound travel demand, which will have to be accommodated at hotels overseas. The usual suspects of regional destinations will be receiving the lion share of demand.

Travel preferences among Chinese travelers do not show signs of an immediate shift towards new markets outside Asia once international travel resumes post-COVID-19.However, the existing destinations in Asia will unlikely be able to absorb the increased demand in a sustainable manner. This presents opportunities for emerging destinations or entirely new locales to accommodate more tourists - hopefully while subscribing to principles of sustainable development, thus avoiding mistakes made in other parts of Asia and across the world.

Outbound trips projections summary, 2019-2030F

Source: AP Projections

Incremental Hotel Demand & Supply Absorption

Based on the above projections of outbound travel, we can develop a forecast of supply absorption. This is relevant for operators to understand future potential in specific markets but also investors to assess growth opportunities. The below forecast incorporates key factors of hotel demand such as average length of stay, double occupancy factor and occupancy rate to arrive at future room supply absorption.

Supply absorption base case

Source: AP Projections

For GC arrivals, a rate of 50% of trips was determined to be for overnight stays – though this number may vary with a higher permeability of the border in the future, we would see this reflected in the top line numbers accordingly first (currently not factored into the analysis).The GC markets indicate a supply absorption of a relatively limited 10,500rooms by 2030 in the base case. Notably this forecast assumes no change to the status quo for visitor arrivals to Taiwan.

For ex-GC destinations, supply absorption from China outbound travel is considerably higher at 261,100 rooms by2030, though spread over a far larger area and concentrated on specific locales. Using the optimistic case outbound travel projections, a higher supply absorption of 35,600 rooms in GC and 601,100 rooms ex-GC by 2030.

One key variable in assessing supply absorption are occupancy levels. The following detail presents a sensitivity analysis by varying future occupancy levels from the base case.

Room absorption rates by occupancy levels, 2025to 2030

Source: AP Projections

By 2030 an additional supply of 124,000 to 552,400 room nights, varying by occupancy levels, can be absorbed by incremental Chinese outbound travel demand. This bodes well for hotel markets globally and particularly in Asia. Key benefactors, assuming stable political relations, will be destinations in North Asia as well as Southeast Asia. Properly developed, there is potential for new destinations in Indonesia, Cambodia, and the Philippines as well as Malaysia, Myanmar, Laos, Nepal and Sri Lanka.

The established destinations of Thailand and Vietnam will have to keep evolving their offering to attract higher-rated demand. Providing a compelling mix of culture, natural attractions and man-made facilities is needed to provide a comprehensive tourism experience for an increasingly sophisticated and demanding traveler.

Hotel investors will be required to think beyond the room product and challenge themselves and other stakeholders in the destination to provide a competitive and attractive tourism offering that manages resources in a responsible and sustainable manner

Conclusion

The hotel and tourism industry must be patient for the return of outbound Chinese tourists and use the extra time to prepare better.

Consumer markets in China are highly dynamic and demands are evolving constantly. A product and experience that sold relatively easy before the crisis may not be as attractive to attract future visitors. 2022 may see the recovery for many international travel markets but not for Chinese visitors just yet.

Investors can take a strategic view and prepare for future demand growth either by seeking out distress opportunities or exploring new development.

References:

  • www.agbrief.com/news/china/08/09/2021/chinese-travel-demand-to-outstrip-tourism-infrastructure-by-end-decade-bernstein/
  • www.china-outbound.com/cotri-latest-presentation/
  • www.ap-ha.com/post/china-outbound-demand-2022
  • www.eiu.com/n/the-road-to-recovery-for-chinese-outbound-tourism/
  • www.morganstanley.com/ideas/china-smart-cities-economy
  • www.oliverwyman.com/content/dam/oliver-wyman/v2/publications/2021/may/when-and-where-will-we-see-chinese-travelers-again.pdf
  • www.scmp.com/news/hong-kong/health-environment/article/3154758/hong-kong-border-reopening-quarantine-free-travel

Dan Voellm, MRICS is the CEO & Founder of AP Hospitality Advisors, responsible for all aspects of the firm. Based in Hong Kong he covers the entire APAC region.

With more than 15 years of consulting experience, Dan Voellm has provided advice in 24 territories across Asia Pacific. Prior to rebranding the firm to AP Hospitality Advisors in 2021, Dan Voellm was Managing Partner of HVS Asia Pacific responsible for five offices in Greater China and Thailand. He started his career to become Vice President at HVS’ global headquarters in New York (2005-2008) conducting a wide range of appraisals, market studies and underwriting due diligence services in 22 states as well as Canada. Dan Voellm brings a strong understanding of the hospitality industry to AP. His experience in hotel and food and beverage operations in Germany, Switzerland, England and the United States is complemented by an Honours Bachelor of Science Degree from Ecole hôtelière de Lausanne in Switzerland.

Dan works closely with key institutional and private owners of hotel properties, financiers, developers and investors, and has gained a strong understanding of their investment requirement and approaches to assessing market values of investment properties. Dan further advises on property and concept development and strategy as well as expert witness testimony.

Dan is vice-chair of the Urban Land Institute’s (ULI) Hospitality Development Council in Asia Pacific and became a Professional Member of the Royal Institute of Chartered Surveyors in 2016.

www.ap-ha.com

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