Do we need to worry about China?
17 AUGUST 2015 6:43 AM
A shaky stock market and worries of an economic bubble bursting in China are beginning to worry hotel company executives who rely on Chinese visitors and investors.
The biggest economic story of the past 25 years has been the rise of China and its transition from a closed, totally planned economy to one that skews more toward capitalism and entrepreneurism. The results have been remarkable, and it’s common to hear people talk about this being the “Chinese millennium.”
Few industries have benefited more from the emergence of the Chinese economy than hotels, both from a supply and demand standpoint.
With 1.4 billion consumers, many of whom are rapidly falling into the broad middle class, travel is one of the top priorities for Chinese citizens. Flush with cash and an itch to travel, Chinese consumers are flocking to destinations around the globe—from Disney World to London to the beaches of Hawaii—filling hotel rooms and spending money.
Business travel also is booming. A recent report from the Global Business Travel Association forecast Chinese business travel to soar 61% in five years, from $261 billion last year to $420 billion in 2019. More startling is the fact that GBTA says this increase will be greater than business travel increases in the next eight largest countries combined.
Given the robust growth in the Chinese economy, global hotel companies have been in a rush in the past decade to build hotels in the country, mostly in the upper-upscale and luxury categories. Starwood Hotels & Resorts Worldwide has been an especially aggressive developer in the country, even relocating its entire executive team to China for a month in 2011.
Chinese companies also have been active in the hotel, tourism and infrastructure arenas around the globe. The Caribbean is a favored investment target for the Chinese government and many private companies. Their investments have included a convention center in Jamaica, a beachfront resort in the Dominican Republic and the now-infamous and but-stalled Baha Mar project in the Bahamas.
Bloom off the rose?
Despite all the good news of the past decade, there are fears the Chinese economic miracle could soon become a bubble that bursts. The Shanghai Stock Exchange Composite Index has tumbled in recent weeks from a 52-week high of 5,178 in June to 3,976 on Friday. The Chinese government has stepped in, infusing capital into the market and instituting controls. Whether these moves are enough to stave off a recession, or worse, only time will tell.
Even in more-open economic markets like the United States or most European countries, central governments are usually quick to step in before an economic catastrophe hits. Given the country’s history of government control over the economy, it seems likely Chinese leaders will pull out all the stops to prevent a crippling free fall.
Failure to contain the damage could have far-reaching effects on the global hotel industry. A jittery Chinese populace might be more reluctant to travel, both domestically and overseas. A slowing economy could also stunt the number of business and leisure travelers coming to the country, putting pressure on the hotel business, which in some markets is nearing capacity, especially in the higher price scales.
Chinese companies might also be forced to step back from their aggressive investment programs, many of which found their way into commercial real estate, including hotels. In the U.S., hotel developers have begun to rely on the EB-5 investment program as a steady and reliable source of financing. That could dry up if the Chinese economy goes south.
Many financial analysts and global business executives believe China will right its ship and the country’s economic miracle will continue to blossom. Chris Nassetta, president and CEO of Hilton Worldwide Holdings, is one of those optimists.
Speaking recently to stock analysts following the company’s second-quarter earnings release, Nassetta said for the rest of the year the company expects gains between 6% and 8% in revenue per available room for properties in China. That follows 10% RevPAR gains in the country during the second quarter.
“China, obviously the economic growth story there is a bit of deceleration, (but) I think they're going to great lengths to stabilize their markets, to keep consumer confidence high because in the end, they're transitioning that economy to be a consumption-led economy, not unlike ours,” he said. “I suspect there'll be some bumps and bruises along the way as there always are in these things, but the underlying fundamentals of 1.3 billion people that no question have ups and downs but are gaining in wealth is going to allow them over an extended period of time to accomplish their objectives.”
Nassetta is backing up that bullishness with plans for additional development in the country, although with a twist. Like most global brand
companies, Hilton to date has mostly added properties in the upper segments of the industry. Going forward, however, much of Hilton’s development in China will be in mid-market properties.
“We're very aggressively trying to do that because that's what's going to build our infrastructure and our network and distribution, which is going to create that network like we've had in other parts of the world, the U.S. predominately and Europe as well,” he said, adding that 17% of Hilton hotel deals in 2014 were for limited-service properties. This year, more than half of deals will be in those segments.
If you have interests in the Chinese market—either as someone who develops, owns or manages there or who serves a lot of Chinese guests—you need to keep your eye on economic events in the country. While caution is appropriate, it’s no time to panic, because this still could become the Chinese millennium.
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