China Watch: Stormy Weather Before Rainbow

(Submitted by Giovanni Angelini, retired CEO of Shangri-La Hotels & Resorts and Founder of the Hong Kong based Angelini Hospitality for the 2016 Hotel Yearbook)

Economy, ambition and behavior; “Short term pains for long term gains”…… Recent news on the overall China situation and of the weakening of its economy has created world-wide concerns. After growing for so many years at around 10% per year, the country is now faced with new painful and serious challenges to handle that includes; exports slowdown, local government and banking debts, deflating housing market, overall confidence etc. As China has become a major global player in all fields and the largest consumer of most commodities, any slowdowns will automatically reflect in most export countries around the world. The recent devaluation of the Yuan has negatively impacted the currency of several Asian countries. The severe drop of the stock market also made a major impact on the value of most stock markets around the world (it is to be noted that after doubling during previous year, Chinese stocks peaked in June 2015 but dropped by approx. 50% within a short period of time as the growth was not sustainable). The country is in process of reorienting the economy from export driven to a greater focus on domestic consumption. In addition, has put in place a strict anti-corruption campaign. It is expected that those two measures, and many others including crackdown on illegal trading will benefit the overall situation in the mid-long term. The annual growth rate has slowed down to around 5% (realistically) and this may become the norm in future years. Of course this is not what it used to be but despite all criticisms that the regime is receiving from many parts of the world, 5% growth still pretty enviable as compared with many western economies.

With this, indications are that in the non-distant future China has potential to become the number one economy power in the world while the USA may retain a grip in the global financial system. It is clear that the objective and ambition of Chinese leaders is to revive the “Chinese Civilization” and make China a great, powerful nation again. Chinese GDP’s expected to surpass USA’s before 2025. The Renminbi is forecasted to become freely convertible within 5-6 years. China’s saving rate at close to 50% of GDP is even higher than its investment rate. Note that China does not rely on foreign borrowings, its growth is financed by resources extracted from its own population.

On doing business with China, we must accept the fact that the Chinese hate instability. The central government has done and will do whatever it takes to sustain its economy, its markets and the country’s social affairs with final objective to maintain stability. Lately, we have seen China at the forefront of International news, regarding to the central government intervention on the devaluation of the Yuan, on the support toward the dropping stock market, on the strengthening of the Internet censorship etc. We must also understand that China will not allow a full blown financial crisis in the Mainland. The country has significant foreign exchange reserves and those could be deployed when needed. Close to half of China’s reserves are invested overseas and if necessary, the central government will repatriate this capital in order to support the currency. Lately Chinese stocks have seen lot of volatility, but comparing 2015 over 2014, the growth of Chinese stocks is still about 50% and this is not bad at all. Of course Chinese investors have to accept that greed isn’t always good and that shares will go up and down just like in the rest of the world.

An important objective of China is to make Shanghai a world financial center not inferior to New York / London / Tokyo, and the direct sponsorship of two new major financial institutions is clearly a proof of it;

  • The “Asian Infrastructure Investment Bank” (AIIB) supported/invested in by 56 countries around the world while China with 26% is the major shareholder and has veto power. One of the purposes of setting up the AIIB is for China to position itself as a global player in the financial sector, not inferior to the USA-backed World Bank based in Washington DC or to the Japanese-backed Asian Development Bank based in Manila.
  • The “New Development Bank” (NDP) sponsored by the BRICS countries (Brazil, Russia, India, China, South Africa) has opened in Shanghai with a capital of 100 Billion USD. China is the main contributor of the bank and holds a voting right of 39.5%.

By looking at what has transpired in China over the past decade, indications are that the country is moving slowly…but steadily away from the communist ideology and its behavior is much more of a capitalist and responsible country. For added perspective, there are now more registered investors in China (estimated at around 200 million) than there are Communist Party members (87.8 million) as reported by the China Security Depositary and Clearing Co. The Chinese dream is about prosperity of the country, rejuvenation of the nation and happiness of the people. This dream cannot be achieved with communism but with the continuation and development of civilization and promotion of a culture toward prosperity.

How the rest of the world will react to this is yet to be seen. The hope is that the reactions will be wise, in particular from the strong economies and large countries, and not too confrontational as China is not at ease with handling external confrontations. Competition and tension between the key players will always be there. All should make the best of the situation and work toward strengthening the global order.

It is important that the world understands the “nationalistic sentiments” of the Chinese people and that there may be times of tension, in particular over territorial disputes like those in the South China Sea that need skillful negotiations/handling. Of course, the future relationship between China and the United States will be one of the defining trends in the 21st century and the hope here is that the two nations will steer toward a common narrative of mutual benefit. (As the 2016 US election approaches, China will be an easy target for accusation from presidential candidates but at the end, this will simply be seen as part of the “noisy-naïve” US political campaign to score points with voters. Of course an increasingly forceful, wealthy and nationalistic China will pose an increasing concern for the next US President).

Outbound travelers; Despite the slowdown of the economy, travelers out of China remains very strong and continues to increase.  2015 will see the number of outbound travellers surpassing 120 million and it is to be noted that Chinese people are more confident in organizing their own travel. Industry leaders expect that within 5 years, the number of travelers out of the country will reach 200 million per year. It is anticipated that the Yuan’s depreciation will not hinder Chinese from travelling overseas. Day-trips and shopping trips, mostly from southern China to Macau and Hong Kong, represents 1/3 of all outbound travelers.

A recent study from Oxford Economics show that by 2023, leisure and business travel by Chinese nationals will represent 62% of the World-International outbound market. Importantly about 90% of China’s travelers are under the age of 45. This group is web and mobile app savvy and heavily reliant on social media (Sina Weibo, WeChat, video site Youku and others), a much younger and “hungrier to travel” group as compared with European and US travelers. Long-haul travel and related costs-expenses are rapidly increasing as more and more Chinese are looking at new, more interesting destinations. Hospitality organizations around the world have to respond and adapt to the demands expectations of those travelers and be “China-ready” if they are interested in this important source of business.

Traveling Trends; There is an increase on luxury cruise travel out of China, in particular for short vacations of around 5 days. Cultural experiences are becoming important in selecting a destination while shopping remains an important part of the trip. Chinese visitors have become much more sophisticated shoppers and keen negotiators as compared with the past. Gaming destinations are experiencing some challenges, a direct result of the Chinese government’s pursuit of an anti-corruption campaign that has led to a substantial fall in high-rolling mainland Chinese visitors in most-all gaming destinations within Asia, Macau in particular. Short holiday trips are increasing while there is a small decrease on long trips of 10+ nights. Demand for first class hotels is on the rise. Booking with tour operators remains very strong.

In support of tourism, visa policies have been related and to facilitate payments, the State-backed payment service from UnionPay is very active on issuing cards/memberships and on installing point-of-sales machines throughout Asia and soon within the West (investment in JETCO). Government planners estimate China’s airports will increase to 240 by 2020 from about 200 today. Chinese airline carriers will fly to most of the capital cities and important financial centers around the world. Ten new cruise terminals are under construction in key coastal cities. The central government is committed on promoting and facilitating tourism with construction-development of new attractions and facilities. Beijing and Chongli will also host the 2022 Olympic Winter Games, a major plus for the tourism industry.

Great appetite for foreign Hospitality assets; The Chinese have become serious players in hospitality real estate around the world, in particular within cities that attract Chinese tourists and at present. There are several negotiations underway. To-date we have seen several transactions;

  • Shanghai Jin Jiang Int. Holdings’ acquisition of the European Louvre hotel group and of 50% of the North American Interstate hotel group,
  • Fosun Int. acquisition of the Club Med,
  • Ambang Insurance Group purchased the Waldorf Astoria in New York,
  • Dalian Wanda Group has large hotel projects in London, Madrid, Australia’s Gold Coast, Chicago, Bel-Air, and also planning to enter New York, Los Angeles, San Francisco and others,
  • HNA (Hainan Airlines)’s investments in; 25% of NH Hotel Group, 15% of Red Lion Hotels, 5% Tsogo Sun Hotels,
  • The Sunshine Insurance Group purchased the Sheraton on the Park in Sydney.
  • The Fu Wah Int. purchased the Park Hyatt in Melbourne,
  • Kai Yuan Holdings took over the Paris Marriott Champs-Elysees,
  • CTS Metropark Hotels Co. purchase the Kew Green Hotels in UK,
  • And several others under negotiation.

Also, there are new Joint Ventures like China Lodging with a few Accor brands, Plateno with Hilton Hampton and others are looking to do strategic alliances in China. Important to note that Chinese State-owned hotel groups are encouraged/solicited by the Government to invest in; International, publically listed foreign hotel groups outside China.

At the time of writing, a merger between two Chinese hotel giants – the Shanghai Jin Jiang Hotels and Plateno Group has been announced. Those two groups combined have the potential and appetite to take over very large global hotel groups.

Globally, Chinese brands (not only hotels) and investors are expected to grow rapidly. Fortune Magazine reports that China has over 4 trillion in foreign currency reserves and there are strong indications that quality/prime assets in Europe and US are targets e.g. Chinese citizen are the top foreign buyers of high quality US and Australian homes.

Hotel Development within China; at present there is an imbalance of supply-and-demand as most cities and destinations are oversupplied in particular by the so-called 5- star hotels. Developers/owners of hotels are now taking a much closer look at the profitability of their hotels “there’s no more ROE: return on ego”. In addition, the present Government austerity measures are making a serious negative impact on the volume of business of the existing luxury 5-star hotels. New hotel products under planning and development are much more efficient with considerably less extravagant facilities, particularly in public areas (food & beverage and ballrooms). Present potential-demand is more for mid-tier hotel products catering to the fast growing middle class (over half a billion by 2020 as reported by The Diplomat) and in some cases, demand for resort products catering to the domestic leisure-families business is on the rise. Association with an international or regional hotel brand remains strong but hotel owners are demanding much more from operators and management fees have been reduced as compared with the past. Interesting to note that franchising is gradually becoming in demand and this may be the trend for the future that hotel operators are going to be faced with.

Despite the oversupplied situation, at present China has around 500 new first class and deluxe hotels with approximately 165,000 rooms opening for business during next 2-3 years.  In addition, a lot more economy and low-rate hotels are in the pipeline.  With the fast growth of the middle class, China is in need of new supply within the near future.

The present difficult situation for the hotel business in China is expected to continue. Gradual improvements may be noticed after 2-3 years from now and it is anticipated that the mid-market and economy sectors/products will be the first to turn-around.