A Booming Chinese Export

Last year, China exported 504 million pairs of socks, 73
million cell phones…and 30 million tourists.

It’s true; tourists have become one of the country’s
leading “exports.” Wanderlust, it seems, is but one of the
many by-products of the flourishing Chinese economy. As
Chinese tourism grows, many of the world’s leisure
companies will enjoy what could be a very, very long boom.

Two years ago, for the first time, outbound Chinese
tourists outnumbered their Japanese counterparts.

By 2020, the World Tourism Organization predicts Chinese
will be taking about 100 million trips a year – placing
them fourth on the list of the world’s most frequent
travelers behind the United States, Germany and Japan. And
by 2035, the Chinese will likely become the world’s leading
globetrotters. Between now and then, many companies stand
to benefit, especially those operating in and around China
itself.

“Behind the forecasts of growth in Chinese tourism,” the
New York Times reports, “are China’s booming economy and
two crucial moves by the government last fall to placate
the growing middle class. Instead of just a restricted pool
of residents of Beijing, Shanghai and Guanzhou, residents
of about 100 second-tier cities also were allowed to travel
abroad. The government also increased the amount of foreign
exchange a person may take out of the country, to $6,000
from $2,000.”

Thanks to their new liberties, nearly 30 million Chinese
hopped on a plane last year, double the number who traveled
abroad three years ago.

“Asia Pacific is now up, up, up and away the world’s most
dramatic tourism performer,” says hotelasiapacific.com.

“The star performer, of course, is China. In just four
short years [although, looking back, they certainly don’t
seem particularly ‘short’], the country’s tourism
juggernaut has set new records – not just for its growth,
but also for the breakneck speed of that growth.

The growing swarms of Chinese travelers are changing the
face of tourism worldwide. For starters, many hoteliers
have learned to apply Feng Shui concepts to room layouts,
to serve “congee” [a rice porridge] on breakfast buffets
alongside eggs and bacon and to avoid placing their Chinese
guests on the “unlucky” fourth floor.

But Chinese tourists are also changing the ECONOMICS of
global tourism.

“It is not just the sheer number of potential travelers
that is making this group attractive, but also their
spending power,” Eurobiz Magazinne relates. “Even before
travel restrictions on Chinese citizens were eased, the
relatively small numbers of Chinese travelers clocked in as
the fourth-largest spending group of travelers in Europe,
after the Japanese, Americans and the Russians, according
to Global Refund.”

Down in Australia, the Chinese already top the list of big-
spending tourists.

“All across the Pacific,” the New York Times reports,
“officials are vying to net the elusive, wealthy Chinese
tourist, seen as the big-spending successor to the Arab
tourists of the 1970’s, fueled by oil dollars, and the
brandaholic Japanese shoppers of the 80’s and 90’s. The
Chinese now dominate or account for a large slice of
foreign tourism in Hong Kong, Macau, Singapore, Taiwan,
Malaysia, Thailand, Vietnam and Indonesia.”

We suspect, therefore, that hotel and leisure companies
throughout the Pacific Rim will reap the bulk of the
Chinese tourism bounty.

Last fall, Christopher Mayer, our colleague at the Fleet
Street Letter, identified one such company: Orient Express
Hotels (NYSE: OEH).

“The company owns a truly remarkable collection of 44
luxury hotels, three distinctive restaurants, five tourist
trains and one luxury cruise line,” Chris explained in his
initial recommendation. “I like OEH’s global character. It
is less dependent on the U.S. consumer, as it caters to the
luxury travelers of the world. Whatever may happen in the
world, there will always be a wealthy few, and they like to
travel.”

Increasingly, those “wealthy few” are carrying Chinese
passports.

It would be a stretch, however, to label OEH a pure “China
play,” since only about one quarter of the company’s
revenues derive from the Pacific Rim. But the stock has
nearly doubled since Chris’ recommendation – a testimony
both to Chris’ masterful stock-picking and to the global
tourism boom.

Meanwhile, Shangri-La Asia Ltd. (Hong Kong: 69), a much
more focused play on Chinese tourism, has gained “only” 45%
since last fall.

Shangri-La, which describes itself as “the largest Asia-
based deluxe hotel group in the region,” owns or operates
more than 60 hotels throughout the Pacific Rim. Shangri-
la’s hotels in China and Hong Kong kick in more than half
the company’s net operating profit, while its hotels in
Singapore, Thailand and the Philippines contribute most of
the rest.

To be sure, the Shangri-La share price, at 20 times
estimated earnings, reflects much of the company’s near-
term growth prospects. But we suspect the stock has not yet
“priced in” its prospective earnings of 2035.

Pull up a chair, the Chinese tourism boom might be around
for a while.

What happens when a housing bubble expires?

An illuminating case in this respect is the very recent
experience in the Netherlands. While traditionally a
country highly conservative in its finances, it developed a
housing bubble in 1998-99, after years of strong economic
growth. House prices and credit growth soared at double-
digit rates. As homeowners cashing in on their burgeoning
home equity went on a spending spree, the household savings
rate plunged from 12.9% of disposable income in 1998 to
6.8% just two years later.

As the chart above highlights, when the Dutch central bank
raised its short-term interest rate from 2.5% to 4.5% from
1999-2000, house price inflation came to an abrupt halt.
Household borrowing and mortgage equity withdrawal slumped
sharply.

Being deprived of their “wealth effects,” the Dutch people
returned to saving from their current income. Within just
three years, the personal savings ratio was back to 12%,
driving the Dutch economy into the worst recession among
the industrialized countries. The growth rate of consumer
spending sagged in a straight line from 4.7% in 1999 to
minus 1.2% in 2003.

The Dutch example confirms that for consumer spending to
slump in the wake of a fading housing bubble, house prices
do not need to fall at all. It is sufficient that they stop
rising, thereby depriving households of new wealth effects
and the associated borrowing facilities.

Therefore, major housing bubbles imperatively end in a hard
landing.