Tourist trap: China’s surpluses may be bigger than thought

FILE PHOTO: A tourist from China takes pictures of Japanese traditional masks at a souvenir shop in Asakusa district in Tokyo

By Jeremy Gaunt

LONDON (Reuters) – Tales of Chinese tourist largesse providing a big boost to destination economies are legend. They may also be incorrect, with China’s current account surpluses understated as a result.

Anna Wong, a senior economist with the U.S. Federal Reserve, reckons the money spent overseas by Chinese tourists — some $215 billion last year, according to one industry estimate — is not all it is cracked up to be.

In a draft paper for the Fed’s governors, Wong says a large amount of the money designated as having come from Chinese tourists globally should actually count as investment in assets.

“Financial outflows concealed as travel imports are large and significant, growing to around 1 percent of China’s GDP in 2015 and 2016, and account for a quarter of recorded net private financial outflows,” she wrote.

This would mean that China’s current account surpluses over the past few years are actually larger than reported, and possibly as big as before the financial crisis.

China’s capital controls make it difficult for wealthier Chinese to invest abroad. But the implication of Wong’s findings is that there are a plethora of ways for the country’s “tourists” to buy property and other assets overseas.

Factors suggesting this is happening come down to the amount of money being reported as tourist-related versus the actual macroeconomic conditions surrounding it.

One example is that China’s travel expenditure as a share of GDP was reported to be higher than Britain’s in 2014, even though the latter’s per capita GDP is seven times China’s.

Similarly, in the same year, spending by Chinese tourists abroad was reported to have increased four times faster than the actual number of tourists.

The way that money designated as tourist inflows ends up as asset buying is mainly anecdotal. Wong cites “purchases of insurance saving and annuity products, real estate properties, and cashback through a cover-up jewelery transaction”, as examples.


None of this is to say that Chinese tourism is not a huge boon to some countries, or that the phenomenon of a new wave of tourists is not real.

But it does have some impact on both tourist economies and China’s finances.

For the former, it means tourist expenditure may not be adding to jobs, revenues and manufacturing in the way that has been assumed.

Instead, a lot of the money designated as Chinese tourist inflow may simply be pumping up asset prices — in real estate, for example — that do not necessarily benefit the economies, or the locals, of the destination countries.

For China, it suggests that official current account surplus data may have been distorted, that far more money is escaping capital controls than believed, and that China’s services deficit has been inflated.

Alex Wolf, senior emerging markets economist at British fund firm Standard Life Investments, says the main implication of Wong’s report is that the current account surplus is larger than implied by official statistics — a hot potato politically.

“Transactions that appear as travel imports actually should have been on the capital or financial account,” he said. “If then the services deficit is smaller than implied, the overall net surplus would then be larger.

“China’s current account surplus is likely as large (as a percentage of GDP) as it was before the global financial crisis.”

Wolf noted that the U.S. Treasury has recently cited progress in China reducing its external balance.

If Wong’s analysis is correct, the Treasury’s assessment may not be.

(Editing by Hugh Lawson)