Where to for the Chinese tourist in 2016?

" Once the current cycle of already-booked tourists rotates out of Japan we believe the inbound numbers will take a hit, at least until stocks stabilise again."
Terrie Lloyd, CEO, Japan Travel KK

The Nikkei has run a number of articles recently expressing fear the current rout in Chinese stocks could impact tourism from the country into Japan. In the past there's been increasing sensitivity toward the Chinese outbound travel market on economic and political developments.

Look at how the number of Chinese inbound tourists dropped by 50 per cent in 2012 over the Senkaku/Diaoyudao Islands debacle. So why are Chinese travellers so nervous about bad news and how will this affect travel numbers to Japan? And elsewhere?

A recent Intercontinental Hotels Group (IHG) study (actually done by Oxford Economics) stated China had about 27 million households in 2013 which earned more than $US35,000 a year and who could comfortably afford international leisure travel. This number is probably around 35 million now.

A bit further down the socio-economic ladder, there were another 23 million or so households earning $US20,000 to $US35,000 and which could also make at least short-haul trips to places like South Korea and Japan.

By 2023, the numbers in both segments are expected to almost triple. So there will be a lot of newly-middle class Chinese people experiencing overseas travel for the first time or, if they are experienced, still have the rest of the world to discover.

FIRST WAVE OVER

The IHG numbers appear to suggest the first wave of substantially well-off Chinese have already done their Japan discovery trips and this segment is now spreading its wings further afield to North America and Asia or nipping down to hideaways purchased in Thailand.

But since the number of Chinese inbound travellers to Japan has continued to increase, it seems the first wave of travellers are being replaced by less-wealthy compatriots who are taking cheap short-haul trips to Japan and combining leisure with more pragmatic 'shopping services' for friends and relatives back home.

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The demographic shift is partly confirmed by Japanese tourism data showing 49 per cent of Chinese families travelling here in the second quarter last year earned around $US40,000 or less.

These people often stretch their budgets to make the trip, as demonstrated by anecdotal stories in the hotel industry of overcrowded hotel rooms, piles of wrapping trash and cooking even when there are no facilities. Too busy to shop but never too busy to eat and drink!

This segment of travellers has less tolerance for financial setbacks and is naturally skittish. Thus, with the losses many Chinese families are suffering in the stock market, once the current cycle of already-booked tourists rotates out of Japan we believe the inbound numbers will take a hit, at least until stocks (and the related housing market) stabilise again.

If it doesn't stabilise in a favorable way, then the inbound numbers will go into reverse for a while, at least until Japan's marketing and tourism authorities wake up and start increasing marketing and incentives for other Asian source markets.

OVER FOCUS

The over-focus of the Japanese government and tourism industry on the China market is of course understandable given the huge financial benefits being enjoyed by companies on the shopping lists of our Chinese guests.

Take electronics retailer Bic Camera for example. This group enjoyed a record net profit of ¥2 billion in the second quarter of 2015, 48 per cent more than the same period in 2014, thanks mostly to tourists.

The company's revenues actually fell by 2 per cent year-on-year but because tax-free sales doubled to 11 per cent of overall sales and Chinese tourists buy more high-margin home appliances, the company's profits came in higher.

Likewise, whether it was electronics, apparel, accommodation, railway tickets, or food, the story has been the same right across the nation.

This is why the idea there might be less Chinese tourists for a while has spooked the Japanese stock market. Some companies directly in the flow of inbound tourist money have seen their stock prices plunge -- such as Asics and Matsuya department store, both of which are at 2015-16 lows.

Does this mean 2016 is going to be a year of doom and gloom for the Chinese inbound tourism sector? Not necessarily.

Obviously things will not go well if the Chinese and perhaps global stock markets go into free fall. But the majority of analysts around the world are saying this appears to be a temporary correction and not the start of a deeper bear market.

We are not economists but common sense tells us this is probably a reasonable assessment, if only because the Chinese government can still go a lot further in stock market controls, devaluing its currency and curbing the outflow of capital, if it wants.

There are several other threats to the Chinese inbound tourism sector this year besides the loss of the shopping-centric segment. Firstly, the emerging repeater 'free independent traveler' (FIT) travel segment, which accounts for about 25 per cent of inbound travellers from China, will be hit if there is a substantial and sustained increase in the yen against the renminbi.

The FX rate at the start of the Chinese traveller boom to Japan in 2013 suggests anything above ¥15 to the renminbi will be impactful. We're at ¥17 at the moment.

Secondly, in the event of another Diaoyudao/Senkaku confrontation all travel segments will be hit.

Terrie Lloyd is a long-term technology and media entrepreneur living in Japan. This is an edited version of his weekly blog from Japan Terrie's Take.