China's Tourism Spending: Key Areas to Watch for Future Growth

Recently, the government has introduced a series of major policies aimed at stimulating economic recovery, with stimulating consumer spending being a key focus. Among consumer spending, tourism consumption is an important segment.

As the capital market warms up, the short-term wealth effect may gradually play a role in stimulating consumption. In the medium to long term, the opportunity for residents' consumption capacity to rebound will also be beneficial to tourism consumption.

For example, in 2023, the total number of domestic tourists was 4.89 billion, a 93.3% increase compared to 2022. In the first half of 2024, the total number of domestic tourists was 2.725 billion, a 14.3% increase compared to the same period in 2023. By the end of the third quarter, the total number of domestic tourists had risen to 4.29 billion, a year-on-year increase of 16.8%. It is expected that the total number of domestic tourists in 2024 will reach 6 billion, a figure that is expected to return to near historical high levels.

The industry's revenue situation appears even more optimistic. In 2023, domestic tourism revenue was 49.1 trillion yuan, a 140.3% increase compared to 2022.

In the first three quarters of 2024, domestic tourism revenue was 43.2 trillion yuan, a year-on-year increase of 17.1%, with the data for the first three quarters approaching the historical peak level of 2019.

Now, the government has shown a strong determination to revitalize the economy both domestically and internationally. Among the many consumer tracks, the tourism consumption industry, which is the first to perform well, has once again met the conditions of "heaven, earth, and people." Will the industry usher in a new round of development opportunities?

I. Timing: The interplay of multiple factors

In fact, China's tourism industry has already become one of the world's second-largest and fastest-growing tourism markets. According to the "2024 Economic Impact Trend Report" released by the World Travel & Tourism Council (WTTC), China's tourism industry contributed $1.3 trillion to GDP in 2023. In the long term, the Chinese market has huge potential: According to WTTC forecasts, over the next decade, China is expected to surpass the United States to become the world's largest tourism market, and the global tourism industry landscape will undergo profound changes.

At the current juncture before the recovery of the macroeconomy, the total domestic travel revenue is about to return to or break through historical highs. After reaching new highs, according to forecast guidance, China's tourism industry still has at least double to triple the space.

Breaking it down, there is continuous improvement in both the frequency of travel for urban/rural residents and per capita spending data.This passage raises a core question: why is there an opportunity for the release of residents' consumption expenditure (increment) in tourism travel? There are at least several major supporting points for this.

Firstly, the top-down transmission direction is relatively clear, essentially following the path of "increase in overall GDP/GDP per capita - increase in consumption and its proportion - increase in the amount of consumption expenditure on tourism travel."

We observe that in developed countries, the proportion of consumption in GDP is generally above 50%. In the second quarter of 2024, private consumption in the United States accounted for 67.7% of GDP. In contrast, in our country, household consumption accounts for approximately 38% of GDP. With the refinement of the domestic financial system and policy guidance, it is expected that the proportion of Chinese (household) consumption in GDP will further increase in the future.

Survey respondents indicated that in China, the average household travel expenditure has already accounted for or even exceeded one-fifth of their annual income. If this proportion can be maintained in the future, it can be deduced that tourism travel consumption expenditure will grow stronger along with the increase in GDP and consumption.

Calculated based on the direct domestic gross value added of the tourism industry, tourism revenue may account for 3% of the global GDP in 2023. Following the aforementioned path, China's data may long-term maintain at more than double this figure.

Secondly, it is also greatly related to the participant structure of tourism travel consumption in the entire society.

For example, there is a differentiation in tourism consumption habits among different age and income groups. Low-income groups have the lowest planning for tourism and are more inclined to short-distance travel, while middle and high-income groups have stronger planning and are more willing to choose higher-quality tourism services and outbound travel. Additionally, young people have become the main force in tourism, with the consumer group aged 23-40 accounting for the highest proportion, especially under the promotion of social media platforms. New media platforms such as Xiaohongshu and Douyin have become the first choice for young people to obtain travel destination strategies.

Furthermore, the wealth effect brought by the capital market has been released. Since September 25th, multiple departments including the central bank, the National Development and Reform Commission, and the Ministry of Finance have密集ly released unprecedented stimulus policies, driving a strong rebound in the capital markets of mainland and Hong Kong. The strong rebound in the capital market has significantly boosted the confidence of residents and enterprises in the economic recovery prospects in the short term.

The wealth effect of the capital market is also expected to be transmitted to the consumption field in the fourth quarter, and the consumption of tourism services by residents is expected to be further stimulated.

A short-term example can be referred to the just-ended National Day Golden Week, where residents' enthusiasm for tourism consumption was high, and the holiday passenger flow and tourism revenue in many regions across the country set historical highs.In the long term, the prosperity of capital markets typically signifies an increase in investors' wealth, which in turn bolsters consumer confidence and makes them more inclined to spend on travel. According to the wealth effect theory, the rise in asset prices increases the nominal total of assets held by the public. The growth in wealth encourages the public to increase their consumption of goods and services, leading to an increase in consumption. On the other hand, as wealth accumulates, people tend to engage in more high-end travel consumption, such as choosing more comfortable accommodations, more refined dining services, and a greater variety of travel experiences. This trend of consumption upgrading brings new growth points to the tourism industry.

Historically, a case in point is the post-World War II prosperity and rise of Las Vegas in the United States. The resurgence of Las Vegas was once seen as a microcosm of the U.S. economic recovery, and of course, it also demonstrated a significant correlation with the U.S. capital market cycle. After World War II, the United States indeed ushered in the largest bull market in its history, which lasted from 1949 to 1959, with a ten-year increase of 273%. It was the increase in per capita income due to economic growth and the significant wealth effect brought by the largest bull market in history that allowed people at that time to have more disposable income for entertainment and travel consumption, laying a huge foundation for the development and takeoff of Las Vegas's tourism industry.

II. Geographic Advantage and National Trends: Irresistible Forces

In recent years, the Chinese government has significantly increased its emphasis on the tourism industry, implementing a series of policies to promote the industry's sustained growth. These policies cover all aspects of the tourism industry, not only promoting high-quality development of the industry but also reflecting a deep concern for national tourism planning. For example, policy documents such as the "14th Five-Year Plan" for the tourism industry and the "Domestic Tourism Improvement Plan (2023-2025)" reflect one of the best periods of China's policy support for the tourism industry, showing the country's high regard for the long-term development of the tourism industry.

In terms of "geographic advantage," in addition to significant long-term policy support, the diverse and unique comparative advantages of the Chinese market should not be overlooked.

Against the backdrop of frequent global geopolitical crises, the relative stability of China and its surrounding areas provides a good environment for the prosperity of international travel formats such as cruises and border travel. At the same time, the enhancement of China's international influence has opened up a new situation for China's tourism industry to participate in international competition, manifested in the rapid increase in the number of visa-free countries and the continuous improvement of the openness of the tourism market.

China's modern culture and urbanization process also have strong appeal. Cultural theme activities such as modern art exhibitions, music festivals, film festivals, and food festivals provide new travel motivation for young tourists.

At the same time, the trend of market penetration in China's tourism market is also worth noting. Consumers are increasingly inclined to pursue higher cost-effectiveness and more relaxed travel experiences, leading to a trend of market penetration, making small cities and third-tier cities and below new tourism hotspots. Taking the travel consumption data during the "National Day" holiday in 2024 as an example, the domestic travel consumption market continues to grow, especially the travel consumption of residents in second, third-tier cities and below is growing rapidly.

The rise of the national travel trend is also a phenomenon that cannot be ignored. In China, travel has become a part of people's daily life, and low-tier cities, small airport cities, county towns, and central towns are becoming new growth points for domestic tourism.

III. The Certainty of Tourism Industry Development Increases, Leading Platforms Are Targeted by InstitutionsUnder the current new circumstances, the outlook for the travel sector is unanimously optimistic. Sell-side research institutions widely recognize that the industry's certainty has significantly increased compared to the past, and new characteristics are gradually taking shape.

For instance, the latest research report from Founder Securities is bullish on the subsequent opportunities in the OTA (Online Travel Agency) market. It points out that driven by the high prosperity of the travel industry and the increase in online penetration rates, the future OTA market may present a long and thick slope of snow.

Additionally, a research report released by Anxin International also indicates that the new trends currently emerging in the travel market include: further shortening of booking windows, a clear trend towards off-peak travel; strong growth in outbound tourism, and diversification of user destinations, which are continuously strengthening. These new travel trends have certain reference value for the adjustment of the supply side, hence the report is optimistic that the agility advantage of OTA platform operations will be amplified. The firm maintains its full-year 2024 performance forecasts for Ctrip and Tongcheng Travel, bullish on Ctrip's supply-side advantages and the long-term potential in inbound and outbound tourism, as well as Tongcheng Travel's user scale advantages and the growth in repeat purchase rates driving an increase in user value.

After the release of the third-quarter economic data, the capital market began to anticipate that there will be more aggressive policies to stimulate consumption in the fourth quarter. If these policies are implemented, family consumption, represented by travel consumption, is expected to benefit further. On October 21, a general rise in the A-share travel, hotel, and civil aviation sectors also preliminarily reflected the continuous resonance opportunities between the market and the industry.

As analyzed earlier, since the conditions of "heavenly timing, geographical advantage, and harmonious people" are reunited, a batch of high-quality companies in the travel track have good development opportunities.

The "2024 Q2 China Travel Consumption Trend Insight Report" jointly launched by环球旅讯 and Digital 100 points out that from the perspective of changes in travel booking habits, OTA remains the first choice for users' reservations, but interest content platforms such as Douyin, Kuaishou, and Xiaohongshu are gradually emerging.

Looking at the listed OTA platforms, Ctrip and Tongcheng Travel each have their strengths - both hold a leading position in China's OTA (online travel market), and their market shares have increased compared to 2019. Among them, Tongcheng Travel has a clear advantage in the mass tourism market, the sinking market, and the young user market, and currently, its user consumption frequency and per capita consumption amount have significantly increased compared to 2019.

Compared with industry competitors, in the first half of 2024, Tongcheng Travel's revenue increased by 48.77% year-on-year, higher than the growth rate of other OTAs during the same period, showing that the company has higher growth elasticity.

From a long-term perspective, Tongcheng Travel's leading advantages are still in a stage of rapid transformation and release.

For example, the industrial chain layout and international strategy seen this year are gradually taking shape and being implemented quickly. Data for the second quarter of 2024 show that Tongcheng Travel's international air ticket volume set a new daily record, with a year-on-year increase of over 160%; the number of international hotel room nights increased by nearly 140% year-on-year, indicating that Tongcheng Travel's expansion and layout in the international market have achieved significant results.Gathering and empowering the industrial chain, and rapidly promoting international layout, these proven strategic measures may provide the company with new growth points and greater market potential.

Recently, Tongcheng Travel also received an increase of nearly 48 million Hong Kong dollars in corresponding shares from JPMorgan Chase. It is understood that after this increase, JPMorgan Chase's latest shareholding number is about 118 million shares, and the latest shareholding ratio is 5.09%.

As an internationally renowned investment bank, JPMorgan Chase can to some extent reflect the high recognition of the continuous important position of China's travel industry in national consumption. Tongcheng Travel is expected to be more optimistic by more institutional investors and "smart money" in the new round of bull market.