China’s sluggish recovery will weigh on Southeast Asia’s tourism economy

Southeast Asia’s hotel industry has shown it can find its footing as it rebuilds from the ravages of the Covid-19 pandemic
However, persistently weak growth in China will inevitably take its toll on the region’s hospitality sector

Nicholas Spiro

Published: 3:45pm, 3 Jul 2023

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When the Covid-19 pandemic erupted, Thailand’s hospitality industry had the rug pulled out from under it more calamitously than most other markets. In 2019, Thailand was the world’s eighth-most popular tourist destination and the second in the Asia-Pacific region after China. It was also the world’s fourth-biggest tourist earner, according to World Tourism Organisation data.

To add to its vulnerability, the Thai tourist industry’s most important source market was mainland China, which accounted for 27.6 per cent of international arrivals in 2019. When Beijing introduced its draconian zero-Covid policy and cut China off from the rest of the world, the average hotel occupancy rate in Bangkok plunged to below 30 per cent and was still below 40 per cent early last year, according to data from STR.

Thailand was not the only market in Southeast Asia heavily reliant on Chinese tourists. In Vietnam, Chinese visitors accounted for a third of foreign arrivals in 2019. Last year, their share stood at just 2 per cent.

Moreover, although Vietnam’s domestic tourist market is larger than Thailand’s, the average expenditure per international tourist in 2019 was US$673, compared with only US$61 per domestic tourist, according to data from McKinsey.

An additional challenge is that the recovery in Southeast Asia’s hotel industry has hinged on the strength of demand from within the Asia-Pacific region. According to data from Pear Anderson, a Southeast Asian tourism consulting firm, Asian countries accounted for the largest share of international tourist arrivals in Thailand, Indonesia, Singapore and Vietnam in the first four months of this year.

“There’s a lot of rhetoric around the importance of long-haul travel. Yet, the reality is that intra-Asian demand is the main driver of the recovery,” said Hannah Pearson, founder of Pear Anderson. This makes the relatively strong performance of Southeast Asian hotels during the past year and a half all the more remarkable, especially given mounting concerns about China’s weaker-than-expected rebound.

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Even before Beijing unexpectedly ditched its zero-Covid policy in December last year, average occupancy rates had risen sharply in Bangkok and Hanoi, reaching 73.8 per cent and 66.9 per cent respectively in November, according to STR data.

Some segments of Southeast Asia’s hotel market have fully recovered or are performing better than before the pandemic struck. Among upscale hotels in Phuket, revenue per available room – the hospitality industry’s gold standard for measuring top-line performance – in the first five months of this year was 114 per cent of 2019 levels, according to data from JLL.

In the more upscale segments of Jakarta’s hotel market, revenue per available room has surged to 124 per cent of 2019 levels, only slightly higher than the level for luxury hotels in Bali. Even in Vietnam, where the recovery has been much slower, revenue per available rom in Ho Chi Minh City has reached 86 per cent of 2019 levels.

The surprisingly strong recovery is attributable to several factors. Southeast Asian hotels were relatively successful in exploiting new sources of demand to fill the void left by Chinese tourists’ absence. In Thailand, Malaysian and Russian tourists accounted for almost a quarter of foreign arrivals in the first four months of this year, with visitor numbers from both countries only slightly below or exceeding 2019 levels, according to Pear Anderson.

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Just as importantly, hotels’ uniquely short lease periods have enabled operators to quickly adjust their prices in response to pent-up demand and the dramatic increase in hotels’ operating expenses, particularly labour costs. Average daily rates in US dollar terms in Bangkok and Hanoi had already recovered to 2019 levels by the end of 2022, according to data from STR.

“Even without Chinese tourists, most of Southeast Asia’s hotel industry was firmly on the path to recovery,” said Xander Nijnens, head of advisory and asset management, hotels & hospitality group, Asia-Pacific, at JLL. This has proved a boon for the sector, given that Chinese outbound travel has struggled to recover since the economy reopened.

A report published by Nomura on June 28 noted that Chinese tourist arrivals in Thailand in May stood at 35.9 per cent of 2019 levels, compared with an average of 89.5 per cent for other source markets. Southeast Asia’s hotel industry, moreover, is facing other challenges, from persistent airline capacity constraints to concerns about a sharper global downturn that could curb demand for travel.

Country-specific risks are also weighing on the recovery, particularly in the investment market. In Vietnam, a severe funding squeeze in the real estate sector and a government anti-corruption campaign have exacerbated investors’ concerns about the relative immaturity of the market. David Jackson, chief executive of Colliers (Vietnam), said that, while the growth potential of Vietnam has never been more apparent, “everyone is in a holding pattern right now”.

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This is why a stronger recovery in Chinese outbound tourism in Southeast Asia would not go amiss. A report published by RHB Bank on June 28 said lacklustre growth in China will result in weaker-than-expected inbound tourist numbers in Thailand this year. Yet, a sharper resurgence in Chinese visitor arrivals in the second half of this year would help underpin a regional recovery facing global headwinds.

Southeast Asia’s hotel industry has already shown that its performance does not hinge on its most important source market before the pandemic. However, persistently weak growth in China will inevitably take its toll on the region’s hospitality sector.

Nicholas Spiro is a partner at Lauressa Advisory

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