Compared to a generation ago, China’s economy is unrecognizable. And in another 20 years, it will have totally changed again.

For starters… it used to be that cheap labour was a centerpiece of China’s economic growth.

I remember traveling to the Canton Trade Fair in the early 2000s. It was the biggest trade fair showcasing just about everything that Chinese companies could manufacture at a lower cost than anyone else.

Stuffed dolls, plates, Christmas decorations, wooden furniture and countless other household items were on display in a building the size of 10 football fields.

There were lots of “Made in China” knickknacks… but there were no coffee shops close to my hotel in Guangzhou. The restaurant there featured bad service – and no English-language menus.

There were no glitzy shopping malls or supermarkets within walking distance of the hotel, and no convenience store for a late-night snack.

15 years later, it’s a different place.

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China’s labour is no longer cheap. Minimum wages have been rising nearly 10 percent a year in the biggest cities. At US$3,700 to US$4,200, annual minimum wages in Beijing and Shanghai, respectively, are two to three times those of Indonesia (US$1,304) and Vietnam (US$1,526).

And the country’s economy has been undergoing a seismic structural shift, from being largely focused on manufacturing for export – to focusing on services (everything from education to entertainment). These are the industries that support higher wages.

That evolution is clear on the street. While I was in Beijing last month, I stopped for coffee at Starbucks, wandered the malls along the Wangfujing shopping district and grabbed some snacks for my 14-year-old son at the JD.com convenience store right around the corner from my hotel.

I also came across a different kind of change… one that doesn’t usually feature in investment theses or financial models, but which reflects other, also seismic, evolutions: Clean public bathrooms.

China is cleaning up its act

Ask anyone who went to China in the 1990s about their worst experience, and you’ll probably hear about epically dirty bathrooms.

When I was in my late teens, I traveled to China near the border with Hong Kong several times. I’ll spare you the details, but the bathrooms at the Lo-Wu border customs and immigration office were memorably gross.

Clean public toilets indirectly reflect development, wealth, and an understanding of quality of life. (Singapore, for instance, has some of the cleanest public toilets in the world.)

Hong Kong could do with a few more public toilets. But there are so many malls and hotels in the city, you don’t have difficulty finding a clean bathroom to use at any time of the day.

This makes it a pleasure to travel within the city. It’s one of the reasons why tourism is thriving in these two countries.

Tourism and travel are responsible for 17 percent of Hong Kong’s GDP. In China, it’s only 11 percent. In Singapore, it’s 10 percent, while the industry accounts for 15 percent of Malaysia’s economy.

Last year, tourism added US$580 billion to China’s economy – about 5 percent of GDP. But it could reach US$1.1 trillion if it reached the same level of contribution as Singapore.

To promote domestic and international tourism in China, in 2015 President Xi Jinping announced a US$3 billion “toilet revolution” throughout the nation’s cities and popular destinations.

A total of 68,000 public toilets have been refurbished, or built from scratch.

In some cities that are popular with tourists, such as Beijing, Haikou and Taiyuan, nicer public restrooms have been built. They function more like rest areas, offering bank ATMs, snack machines, Wi-Fi and recharging stations for mobile phones.

But they’re only half done. Another 64,000 will be refurbished or built over the next two years.

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A service economy prerequisite

New, and clean, toilets are just another subtle sign that China is transforming its economy into a more service-oriented one.

Beijing is promoting domestic travel, and also making it more enjoyable and convenient for foreigners.

According to Travel China Guide, a Chinese travel statistics website, each foreign visitor spends, on average, US$884 per trip to China. That’s 550 percent more than what domestic tourists spend (US$134).

So there’s enormous potential for increasing the travel industry’s contribution to China’s economy, which has been slowing.

China gets only 29 million foreign visitors each year (not including visitors from Hong Kong and Macau). By comparison, 77 million people visit the U.S. each year.

That means foreign visitors to China are equivalent to just 2.2 percent of the Chinese population. In the U.S., it’s 25 percent.

So China’s foreign tourist arrivals could quadruple in size — to 116 million a year — and still have plenty of room for growth.

Travel within China is also getting better in other ways

Admittedly, there are still things Beijing needs to address before inbound tourism breaks out.

For starters, pollution in key cities from having too many cars on the roads turns off tourists from first world countries. There are also horrendous traffic jams in Guangzhou and Beijing… a lack of multi-lingual signs… and Chinese-only-language menus that make it difficult for foreigners to know what they’re ordering.

But technology is making travel within China a more pleasurable experience.

Smartphone apps can now translate your message to your driver, sales attendant, or airport security within a couple of seconds. An Uber-like ride-sharing service, called Didi, is making travel within cities safe and convenient.

English-speaking tour guides are becoming more common.

High-speed trains that connect all of China’s major cities, including Shanghai, Beijing, Guangzhou and Shenzhen now operate daily.

All of this, including cleaner toilets, is going to further open the country’s tourism industry to growth.

One way to gain exposure to this industry is through the PowerShares Golden Dragon China Portfolio (Exchange: New York; ticker: PGJ). 

PGJ is one of the few exchange-traded funds that holds a substantial amount (10 percent) of its assets in travel-related Chinese stocks like online travel and reservation behemoth CTrip.com and China Lodging Group, one of the largest hotel management companies in the country.

Good investing,

Brian Tycangco
Editor, Stansberry Pacific Research