China Tourism Report Q2 2008

Preliminary 2007 Figures Promising Preliminary 2007 tourist arrivals figures released by the China National Tourist Office suggest that 2007 was another strong year for the tourism industry. Figures for January-October 2007 indicated that tourist arrivals during this period totalled 131.8mn, boding well for the achievement of our full-year forecast of 141mn tourist arrivals. As expected, Hong Kong received the bulk of the tourist arrivals, being the main transport hub by which most foreign tourists enter China. In the January-October period, tourist arrivals into Hong Kong totalled 77.9mn, more than half of total tourist arrivals. This represented growth of 5.5% year-on-year.

Arrivals into China's other Special Administrative Region (SAR) of Macau - which has positioned itself as a gambling attraction - were less impressive, with tourist arrivals totalling 23.2mn over the January- October period, representing a contraction of 5.0% year-on-year. More positive were figures for overall foreign tourist arrivals, as opposed to domestic tourism between the regions and the four SARs. Foreign tourist arrivals surged by 17.6% year-on-year, to 26.1mn, illustrating China's success in marketing itself as an attractive tourism destination.

Such figures are an encouraging sign for yet stronger growth in 2008, when we expect the impact of the August 2008 Beijing Olympics to give a significant boost to growth. We anticipate Olympic-related arrivals to boost 2008 tourist arrivals as a whole by 10% year-on-year, after growth of 4-6% year-on-year for much of the previous decade. Although tourist arrivals in H1 2008 may dip somewhat, as tourists hold off booking trips in order to coincide with the games, we expect Q3 2008 to more than make up for this.

Pre-Olympics Infrastructure Boost In preparation for the Olympics the Chinese government embarked on a major programme of infrastructure investment, enshrined in the 2006-2010 Economic Plan. This has reaped benefits; the Beijing International Airport has been substantially expanded and improvements have been made to the country's inadequate transport network.

Spending on the railway network alone is projected at US$200 billion, as opposed to US$50 billion in the 2001-2006 period. The government plans to construct an extra 300,000 km of roads by 2010 (excluding expressways and highways) and to construct 97 new airports by 2020, in addition to the existing 142.

Improved infrastructure across the whole country will allow Olympics-related tourists to travel further within China, spreading the benefits of tourism spending to companies and communities beyond the Beijing area. These benefits will be felt beyond the Olympics, with the improved infrastructure proving an added long-term incentive for tourists to visit China.

Terrorist Threat To Olympics Concerns regarding a potential terrorist threat to the Beijing Olympics were heightened in March 2008 when the Chinese authorities revealed that at least two efforts had been made to target the Olympics. A January raid in the western region of Xinjiang allegedly gathered materials that could have been used to construct a bomb, with indications apparently being that the separatist Uighur movement would attempt to target the Olympics. In a separate incident, the regional authorities stated that an attempt was made to crash an internal flight from Xinjiang capital Urumqi to Beijing on 7 March.

There had long been concerns that the Olympics would prove an attractive target for terrorists, and China has taken considerable efforts to reassure the international community that security will be high. Indeed, the relatively low-level nature of these terrorism attempts - which were apparently disorganised and lacking in resources - may even serve as some encouragement, indicating that the Chinese security services are well able to track and counter any potential terrorist efforts. Nonetheless, concerns about terrorism can only act as a disincentive to tourism, although it is unlikely to have a significant effect on Olympics related tourism.