China has continued to be the largest tourist source market for the U.S., with an estimated $33 billion in total spending in 2016. However, it is not clear to what extent corruption, money laundering, and other illicit practices influence the flows of capital out of China that are often categorized as “tourist spending,” but the relationship is undeniably strong. Without knowing the full extent of how much authentic tourist spending constitutes the total value of revenue derived from Chinese tourists, it’s challenging to forecast the growth of Chinese tourism to the U.S.
Anna Wong, a senior economist at the Federal Reserve, was quoted in late June saying that Chinese tourism may be vastly overestimated. According to Wong, much of what classifies as Chinese “tourist spending” is in fact asset investment. As such, hospitality, travel, and other tourism-related firms banking on the large volume of Chinese tourist spending, estimated at $215 billion, might be much riskier than the numbers imply.
Much of the luxury spending abroad by Chinese tourists is in fact nothing more than money laundering
Much of the asset investment done by Chinese “tourists,” whether it is the purchase of real estate or annuities, is done in the form of a “cover-up jewelry transaction.” As a result, much of the luxury spending by Chinese tourists in the U.S. is, in fact, nothing more than money laundering.
Wong notes that much of what is actually intended for asset investment abroad is concealed as tourist spending to circumvent Beijing’s capital controls. Since the ascent of Xi Jinping to power in 2012, the central government of China has made anti-corruption and outbound capital control top priorities.
The reasons for the crackdown on corruption in China are multifaceted, but fundamentally it comes down to economic concerns about wealth drain and the moral and legitimacy crisis that corruption represents to the Chinese government. Many wealthy Chinese consumers have attempted to funnel capital outside of mainland China to safeguard ill-gotten wealth from Beijing’s oversight.
Chinese tourist spending in the U.S. may be vastly overestimated
Wong’s comments should raise red flags for those depending on Chinese tourist dollars. One obvious reason is that Chinese tourist spending in the U.S. may be vastly overestimated, meaning that it will be more challenging to make financial and business forecasts based on potential revenue from Chinese tourism.
However, arguably just as troubling is the potential for sharp drops in revenue as Beijing continues its campaign to curb such activity. Capital controls and oversight may not directly target real tourist spending, but future new capital outflow restrictions may by extension limit or discourage Chinese tourist spending, meaning that such spending could drop dramatically in a very short time frame.
These capital outflows via overseas investments have even landed some of the most prominent Chinese firms in hot water. Anbang, Fosun, Wanda Group, and HNA have all come under scrutiny for overseas investment behavior and all of which are involved in the hospitality or tourism industries at home or abroad. These concerns about increased government scrutiny of foreign investment may be in part why HNA has recently announced a domestic investment of $7.5 billion into a new travel app called “HiApp.”
Already this year, Chinese State Administration of Foreign Exchange issued new guidelines mandating that Chinese banks must report transactions abroad exceeding US$147 (1000 RMB). Now even smaller purchases abroad made with illicitly acquired money could be subject to scrutiny, indicating that luxury spending abroad by Chinese tourists will see an impact.
In his speech at the National Congress of Communist Party of China, which is held every five years, Xi vowed to step up his battle against corruption. The continued commitment to anti-corruption has been accompanied by the establishment of a new, stronger corruption watchdog agency, called the Supervisory Commission, that will integrate the already existing Central Commission for Discipline Inspection (CCDI).
Chinese “tourist spending” will be under increased scrutiny
In short, Xi’s anti-corruption drive that began three years shows no signs of slowing down, which means that the kind of “corruption” or illicit capital outflows that make up much of Chinese “tourist spending” will be under increased scrutiny.