Will Chinese Retaliation over THAAD Cause Overall Chinese Tourism to Drop for First Time?

    Chinese curbs on tourism to South Korea over THAAD is causing concerns that Chinese outbound tourism may see negative growth for the first time.
    Analysts fear that Chinese arrivals in South Korea may drop by 70 percent in 2017. (Shutterstock)
    Daniel MeesakAuthor
      Published   in Finance

    With Lotte approving the land swap deal which would make one of its golf courses in South Korea into a THAAD deployment site, and the defense system already arriving—China has begun its retaliation against South Korea. As expected, Chinese tourism to South Korea was the immediate target for retaliation efforts. With analysists fearing as much as a 70 percent plunge in Chinese arrivals, will curbs on tourism to Korea cause Chinese outbound tourism suffer its first year of negative growth in 2017?

    South Korea received over 8 million Chinese visitors in 2016, making it the fourth most popular overseas tourism destination for Chinese tourists, only outnumbered by Hong Kong, Macau, and Thailand. With Chinese tourists almost making up half of all foreign visitors in South Korea, the negative effects of a heavy crackdown on tourism to South Korea are obvious for its many hotels, retailers, and entertainment businesses. However, with South Korea representing such a large of all China’s overseas visits—especially when not taking the Special Administrative Regions (SARs) of Hong Kong and Macau into account—it could put a dent in Chinese outbound tourism growth as a whole.

    While Hong Kong and Macau have long remained the foremost destinations for Chinese travelers, countries such as Australia, South Korea, Japan, and the United States have been responsible for tourism growth, whereas the SARs have either stagnated (Macau) or declined (Hong Kong). In fact, the number of Chinese visitors in South Korea grew by 34.8 percent—far outpacing overall Chinese outbound tourism growth and in spite of Chinese authorities encouraging travelers to avoid South Korea. According to Chinese government statistics, the total number of outbound trips from China reached 122 million in 2017, up 4.3 percent from 2016. Excluding visits to Hong Kong and Macau puts the number at 58.8 million—with South Korea accounting for a staggering 13.7 percent of all Chinese travel to non-Chinese destinations.

    A 70 percent drop in Chinese visits to South Korea would reduce tourism the a similar level to that five years ago. (2007-2016 data from Korea Tourism Organization)

    Needless to say, a 70 percent drop in Chinese arrivals in South Korea could potentially cripple Chinese outbound tourism growth in 2017, maybe even bringing growth rate down to negative growth since it would wipe out over 5.6 million visits to South Korea in 2017. In comparison, Chinese overseas visits only grew by 3 million between 2015 and 2016.

    For tourism stakeholders in South Korea, the recent fallout between the two countries leaves few other options than continuing, and perhaps intensifying, tourism diversification efforts, as well as making sure to increase efforts to attract Chinese independent travelers—so far unaffected by the retaliatory measures—to make the most of a complicated situation. With the deployment of THAAD already underway, chances of successfully lobbying the government to reverse its decision seem unlikely, especially when taking North Korea’s recent provocations into account.

    For China’s own Chinese outbound tourism industry as well as other overseas destinations, the question is if South Korea’s role in international travel can be substituted by other destinations. South Korea, a highly popular destination because of the popularity of its pop culture, fashion, and cosmetics in China, has been particularly popular among Chinese women—who account for almost half of all Chinese visitors in South Korea. These unique aspects have all boosted South Korea to become the fourth most visited destination by Chinese travelers, and for the very same reasons, could make it difficult to argue that a visit to South Korea is easily substituted by a visit to, for instance, Japan or the United States. However, the likeliest beneficiaries of the fallout between China and South Korea are in the short-haul market, representing travel experiences at similar cost and distance. Even Hong Kong, which has seen arrivals drop in recent years, may see a resurgence in Chinese visits as it’s well-positioned to become a shopping destination for Chinese people looking to buy Korean products—especially if the Chinese-Korean differences escalate into a trade war. Japan, while not a k-pop or Korean fashion powerhouse, may also see some visitors that otherwise would have visited South Korea instead choose to visit Japan to enjoy its distinct pop culture and fashion. The high prevalence of Korean brands and shopping experiences in Japan also help make it a prime contender to compete for Chinese tourists now unable to visit South Korea.

    It remains to be seen if the impact of South Korea’s THAAD deployment will be as significant as many analysts fear, but it raises red flags in China, South Korea, and beyond. For China’s many tourism companies, continued growth is vital to their high valuations and continued overseas investments. For South Korea, the fallout could have repercussions that influence not only the tourism industry, but also its brands and entertainment industry. For other countries in the region that are highly reliant on the cash injection that Chinese tourism represents, it also instills fears that China won’t shy away from using tourism as a foreign policy tool in the future.

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