Almost US$13 billion in foreign capital has been invested in new China tourism projects this year. Zheng Li of the China Securities Journal looks at the inflow and at the government’s plans to attract and regulate investment in the sector

China’s tourism sector has opening to the rest of the world ever since the country adopted economic reforms more than 20 years ago. Combined with a steadily opening capital market, the steady growth of the tourism sector is offering foreign investors endless opportunities to earn a return on their capital through China’s vast land area and its long history.

Statistics show China’s tourism sector draws between US$4.07 billion and US$5.43 billion (RMB30 to RMB40 billion) in investment annually from offshore, accounting for 25% of new tourism-related capital in hotels, travel agencies and site maintenance.

Experts predict that China’s tourism sector will grow at least 10% annually over the next few years. Private tourism spending is expected to grow 9.8% each year, while corporate and group tourism spending is expected to grow 10.9%. Revenue from the tourism sector is expected to account for 8% of China’s GDP by 2010. The World Tourism Organization forecast that China would be the largest tourist destination and the fourth largest source of tourists by 2020. They are predicting the gigantic market will continue to attract overseas capital.

China’s tourism climate is also developing. Infrastructure is continuously improving, tourist operations are becoming more professional, the investment mindset is maturing and government services are becoming better orientated to the needs of the sector. Together, these changes are attracting more and more foreign capital.

Steady growth attracts foreign capital

Overseas investors represented an unprecedented 30% of all participants at the recent 2007 China Tourism Investment Seminar in Ningbo, Zhejiang province, making it the most “internationalized” of the three seminars held to date. More than 3,000 representatives from more than 60 international investment firms from Singapore, the US, France, Japan, South Korea, Nigeria and Pakistan attended, hoping to make a foray into the lucrative market.

China has drawn tourism sector investment from 27 countries and regions. Hong Kong, the US and the UK are the three biggest sources of capital, accounting for 50%, 11% and 9%, respectively, of the foreign capital invested in the tourism sector.

Investments from offshore have principally focused on the eastern coastal regions. Zhejiang province, near Shanghai, accounted for 27% of the foreign capital invested, Fujian province 12%, Jiangsu 11% and Guangdong 10%. Other provinces and cities are also sparsely covered.

China’s tourism sector signed 212 overseas-funded projects in 2006 worth US$1.403 billion, 40 of which were major projects. Around US$440 million of the foreign capital earmarked for the sector was spent that year.

In 2007, the stream of overseas investment in the tourism sector has grown to a torrent. Statistics show 129 projects worth US$12.973 billion have so far been signed this year, the largest in Asia. Experts are predicting this level of funding will continue.

According to the National Tourism Administration, 12,697 projects worth US$241.53 billion (RMB1.78 trillion) have been earmarked for China’s tourism sector during the current 11th five year plan, with US$18.80 billion (RMB138.56 billion) expected to come from foreign sources.

Government’s “visible hand” indispensable

Currently, 24 provinces or cities in China rank tourism as a pillar or preferred industry and offer preferential treatment for foreign investment. However, foreign investment in China’s tourism sector does not come without unintended side effects.

Analysts say market-oriented capital always leads to a mentality of quick success and instant benefits. Furthermore, foreign investors are unfamiliar with Chinese resources, traditions and culture, which can result in the incorrect positioning of regional tourism products, incomplete project planning and even local ecosystem damage. Protection of the environment, heritage sites, natural scenery and historic architecture will therefore be the top priority for the government when approving foreign-related projects.

The credibility of tourism operations is also of concern, with some fake investors colluding with the government to make it look like it had been successful in attracting investment while not investing a penny.

Wu Wenxue, head of the Planning and Finance Department of the National Tourism Administration, said that local governments should not adopt a laissez-faire policy towards foreign capital but should rather increase their control over the sector and intervene if necessary to assure the sound development of tourism in China.

Experts also said local governments should campaign internationally for funding to develop local tourism resources, set standards for tourism innovation and release guidelines for tourism-related investment to raise industry standards and develop more sophisticated tourism products.

This article originally appeared in Chinese in the China Securities Journal on December 18, 2007. The China Perspective takes no responsibility for the accuracy of the original article.