In the run-up to the weeklong national holiday for Chinese New Year, there is concern that the weaker yuan could affect consumers’ travel arrangements and impact their spending habits while overseas.
Earlier this month, a Reuters poll recorded pessimism about the yuan as being the highest since April 2010. The currency has already lost 1.5 percent against the U.S. dollar this year, after shedding 4.7 percent in 2015.
Andrea Fenn, founder of Fireworks, a digital consulting agency specializing in the fashion and luxury sector, believes that the currency’s depreciation could have a big impact on Chinese consumer spending overseas. “I see extreme elasticity in consumption patterns whenever the yuan loses ground against other currencies. I think, however, there might be a chance of sustained consumption as Chinese are convinced that the yuan will continue to fall throughout the year — i.e., let’s buy now before our currency tanks,” said Fenn.
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In order to mitigate risks, some Chinese New Year tourists are choosing to exchange yuan for U.S. dollars before leaving China, instead of having to buy dollars or pay off credit cards at a later date, when the yuan could be even lower. However, this rush, exacerbated during the run-up to Chinese New Year when households are looking to be cash rich for plentiful hongbao — red envelopes packed with wads of cash as tradition dictates — is being carefully controlled by the central bank.
It is possible for customers to exchange $5,000 a day at a bank if the funds are readily available, which, often, they are not in smaller branches. For larger currency transactions, customers must make a reservation to exchange the currency at a later date. There is also a new annual foreign-exchange quota of $50,000 a person. Regulations have now been put in place by the central bank to try and stop people from using their annual foreign-exchange quota to lend to others.
“If the money is not at the bank, it can take a week to order. I have always been busy with customers, but now I am even busier with the new regulations brought out at the beginning of the year and Spring Festival coming up,” said one such moneylender, operating on the edges of the law and not wishing to be named.
As the People’s Bank of China looks to control the flow of currency out of the country, UnionPay, the country’s main bank card association established under the approval of the State Council and the People’s Bank of China, added a new annual limit on overseas withdrawals. The company’s Web site states that the amount of foreign currency that can be withdrawn with each domestically issued UnionPay card is now capped at 100,000 yuan a year.
Policymakers at the central bank released a statement last week acknowledging that liquidity in the banking system had become more volatile due to heightened instability in the financial markets, as well as cash supply being in high demand in the time leading up to Chinese New Year. “Strengthened monitoring and forecasting, combined with comprehensive use of various monetary policy tools, will be needed to adjust and maintain adequate liquidity in the banking system, in order to ensure stable market interest rates and reinforce financial support to the real economy,” the central bank said.
As the government keeps a steely grip on the supply of foreign currency, the PBOC has been using its reserves to buy yuan and maintain stability. “China’s PBOC is facing a tricky dilemma. On the one hand, they want the yuan to be seen as a global currency, and as such, have some pressure on them to allow it to trade freely, but at the same time they are very worried about consumer confidence and business confidence and do not want the currency to slide too far,” said Benjamin Cavender, principal at China Market Research Group.
Chinese outbound tourism remains on track to reach 200 million by 2020, despite the expectation that Chinese outbound tourist growth will slow to 9 percent over the next five years from 17 percent over the past five years, according to a survey released by CLSA, an independent brokerage and investment group.
The survey noted that a weaker yuan was one of the key risks to the growth of outbound tourism, and that 43 percent of respondents indicated they may reduce the number of trips they take if the yuan depreciates by 10 percent in the next year, while 35 percent said they would cut shopping spending. Only 14 percent said there would be no impact to their travel plans.
“We still expect there will be positive growth in outbound Chinese tourism during the upcoming national holidays vs. last year but the growth rate will slow down given the softer macroeconomic environment and the weaker yuan. We believe people will shift travel to less expensive destinations such as Thailand and other warmer climates in Asia-Pacific,” said Aaron Fischer, CLSA head of consumer and gaming research.
The appetite for overseas travel in China has been growing as a result of a rising middle class and increasing ease of access to foreign destinations. Liu Li, for one, now has the opportunity to travel and has no intention of curbing her foreign holidays as a result of the weak yuan. “I might change the amount I spend abroad, but I will also plan and see which country is good for me to visit. I don’t think the yuan will always be so weak,” said Liu, a white-collar manager who makes two to four overseas trips a year.
As Chinese tourists favor less expensive countries as a result of the yuan devaluation, once popular long-haul destinations are now at a disadvantage. “Europe probably will not receive as many Chinese visitors as expected in part due to the currency devaluation, but also because there has been a fair amount of press recently about sexual assaults in countries like Germany, and because people do not have a clear understanding of what is happening in regards to the refugee crisis,” said Cavender.
Previously, a big lure for Chinese tourists when traveling abroad was the comparatively cheap price of foreign goods, particularly luxury products. However, as the currency depreciates, and lower import taxes come into play, savings are becoming negligible, and this could affect Chinese consumer spending.
“I am expecting consumption to move from international to domestic in 2016 as a result of lower import and consumption taxes and the growth of cross-border e-commerce. Giant retailers including Wheelock and Wharf are moving to e-commerce with the conviction that consumers, especially middle-class ones, will find it less meaningful to travel outside to shop as price difference is reduced. This particularly applies to light-luxury, low-ticket products catering to the middle-class,” said Fenn.
October’s Golden Week was the first national holiday since the Chinese stock market crash last summer, and Mark Tanner, founder and managing director of China Skinny, a marketing, research and online agency, believes that the October holiday is a good indicator of what is in store for Chinese New Year.
“I don’t expect the weakening yuan to have too much of an impact on Chinese outbound travelers during the Lunar New Year period. The yuan’s similarly large, but a more dramatic fall last August did little to dampen enthusiasm for Chinese heading abroad during the 2015 October Golden Week, which saw travelers increase 11 percent on 2014. The yuan has stayed strong against currencies such as the Aussie and Kiwi dollars, which are lovely this time of year. It is also stronger than it was a year ago against the Thai baht and Indonesian rupiah to name a few, so it may have an impact on where they go, rather than whether they go. I’d expect them to be shrewd shoppers, as they always are, but given retail spending expanded at 11.3 percent last year, I expect growth in the habit will continue at home and abroad,” he said.
Compared to middle-class consumers, China’s superrich are not expected to be as sensitive to depreciation in the yuan when it comes to travel and overseas spending. Travel is still the number-one leisure activity for Chinese superrich and one of the highest expenses for respondents of the Chinese Luxury Consumer Survey 2016 compiled by Hurun Report, a businesses and luxury lifestyle media company.
“The Chinese luxury consumer has seen the economy slow down, but they are still the largest consumer group in the world for luxury, and they are traveling more than ever. As such, they are still one of the most committed buyers of luxury anywhere in the world,” said Hurun Report’s chairman Rupert Hoogewerf.