Most people travel to see the world. But Chinese travel to buy what the world has to offer…
In Paris, the flagship store of Louis Vuitton regularly has a long line of Chinese tourists waiting to get in. It’s known for its US$15,000 Chain Louis GM shoulder handbags and US$30,000 Capucines BB alligator skin purses.
A similar line usually snakes outside the Chanel and Prada stores in the Gateway Shopping Centre in Hong Kong.
Chinese enter with pockets full of cash and leave with all the leather belts, shoes, wallets and purses they can carry.
High sales taxes in China, a desire to show off wealth and a perception that better designs can be found overseas have fueled Chinese tourists’ shopping appetites.
But this is a recent phenomenon.
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Until 1990, few Chinese people were allowed to travel outside the country. China was still mostly closed to the world, and only government officials and the ruling class could go abroad.
If you lived in China and wanted western-style clothes for your kids, a Swiss-made wristwatch or a Japanese motorcycle, the only way to get it was to have a relative in Hong Kong bring it across the border.
I should know. When I was a teenager, I imported a motorcycle from Hong Kong into Shenzhen to earn a few bucks.
Today, more than 40 million Chinese tourists travel to Hong Kong every year. And lots of them go to buy luxury goods and gadgets that can cost 17 percent to 30 percent more in China because of taxes.
China is reshaping global tourism
Last year, Chinese people made 150 million trips overseas. They also spent an estimated US$120 billion – mostly on shopping and other travel-related expenses. That made China the world’s second-largest outbound tourism market by value.
And with outbound tourism (that is, people traveling abroad) growing 15 percent a year, China is set to eclipse the U.S. as the world’s largest outbound tourism market by 2020.
By 2025, Chinese will be spending US$250 billion a year overseas when they go on vacation.
But Chinese tourist spending should be even bigger than it is. You see, Beijing has set limits on the amount of money its citizens can bring out of China.
The amount of renminbi that Chinese can convert into U.S. dollars to spend on travel is just US$5,000.
Beijing has also capped the amount of money Chinese travelers can withdraw from their personal Chinese bank accounts while overseas to just US$15,000 per year.
But anyone who’s seen how much Chinese tourists spend in Louis Vuitton, Chanel and other luxury designer stores knows they spend much more than US$5,000 to US$15,000.
To give its Chinese tourists more freedom to splurge, Beijing has been promoting cashless payments beyond its borders.
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The spread of cashless payments
In China, people no longer carry cash and credit cards. Instead, they buy and sell things using their smartphones and cashless payment apps like WeChat Pay (the electronic wallet function of the popular WeChat messaging service) and AliPay (another electronic wallet service).
Those two apps accounted for most of China’s US$30 trillion in cashless mobile payment transactions in 2017.
According to business consulting firm Frost & Sullivan, the market for mobile payments in China is expected to grow at a compound annual rate (CAGR) of 21.8 percent from 2017 to 2023, hitting a massive US$96.7 trillion by the end of the period.
These figures are huge – several times larger than China’s own GDP. That’s possible because cashless transactions include money transfers, which don’t involve the sale or purchase of any good or service.
In China, cashless transactions include everything from buying a can of soda at 7-Eleven to sending (within a few seconds – and for free) 1,000 renminbi (US$147) to relatives living in different cities.
WeChat Pay (only available to Chinese residents) alone has over 900 million monthly users. Alipay has about the same.
A WeChat and AliPay sign at an electronics retailer
And WeChat Pay and AliPay are spreading outside of China, allowing Chinese tourists to purchase goods and services without using cash in countries around the world.
As of the end of 2018, WeChat Pay is accepted in 49 countries. AliPay is available in 54 countries.
When Chinese pay using WeChat Pay or AliPay overseas, they pay for their transactions in renminbi using a real-time exchange rate. Their accounts are debited instantaneously.
The amount transacted overseas through these cashless payment providers was estimated at US$30 billion last year, or about 25 percent of the total amount spent by Chinese tourists overseas.
Chinese tourists quadruple their spending power when they go cashless
Beijing is promoting the use of WeChat and AliPay overseas because it sees cashless payments as a way to give Chinese citizens what they want – higher spending capabilities overseas – without the need to convert large sums of renminbi into U.S. dollars (or other major currencies).
For instance, AliPay has a limit of 40,000 euros for mainland Chinese traveling to Europe, while WeChat’s limit is 10,000 euros. That’s as much as eight times larger than the current limit on U.S. dollars that Chinese can bring out of the country.
Higher spending limits for Chinese tourists – soon to be the world’s biggest outbound tourism market – will clearly benefit the global travel industry… and companies that sell the luxury goods and gadgets they buy.
One way to invest in this long-term trend is through shares of the iShares Global Consumer Discretionary ETF (Exchange: New York; ticker: RXI).
It holds a basket of international branded consumer companies that stand to benefit from China’s growing outbound tourism market. These include European luxury conglomerates LVMH (which owns Louis Vuitton) and Compagnie Financiere Richemont SA, as well as Nike and Starbucks (which is booming in China).
Editor, Stansberry Pacific Research