Night markets such as Taipei's Shilin Night Market are among the most popular attractions for both foreign and domestic tourists.

Beijing’s latest weaponization of tourism illustrates the risk of relying on the mercurial China market

Taiwan’s hospitality sector could contract this year following Beijing’s decision to sharply curtail the flow of visitors from China, reversing many years of steady inbound tourism growth.

Over the past decade or so, Chinese tourism has benefited Taiwan considerably. Before the opening of the market to Chinese visitors in 2008, Taiwan was an obscure tourist destination except for the Japanese, who feel a special connection to the island because of their 50-year colonial rule (1895-1945).

The arrival of the Chinese heralded a boom in hotel construction that has made Taiwan more attractive to all visitors. More importantly, Taiwan woke up to its own tourism potential. The Chinese – neighbors sharing a common language and cultural heritage with Taiwan – were just the beginning. In recent years, Taiwan has seen a substantial rise in arrivals from South Korea, Hong Kong, Southeast Asia, India, and the United States.

Because of their sheer numbers, the Chinese still account for the largest share of Taiwan’s tourism market – 2.7 million visitors or more than 24% of the total in 2018. That’s a major risk given Beijing’s tendency to use tourism policy for political purposes. On July 31, Beijing abruptly prohibited its citizens from going to Taiwan as independent travelers, citing “the current relations between the two sides of the Taiwan Strait.”

The ban reversed an eight-year-long period of opening that market. Group tours continue to be permitted on a reduced basis, but they could be nixed in the lead-up to Taiwan’s January presidential election.

China has been upset with Taiwan President Tsai Ing-wen’s refusal to recognize the “1992 consensus,” a vague oral agreement in which Beijing and Taipei acknowledge that Taiwan and the Chinese mainland both belong to a single entity – “One China.” Tsai’s predecessor, Ma Ying-jeou, accepted the 1992 consensus as a precondition for deepening ties with Beijing, though reserving the right for Taiwan to have its own interpretation of the meaning of One China.

The loss of the Chinese market will batter Taiwan’s hospitality sector. CBRE, a property consultancy, estimates that Chinese tourist arrivals could plummet by 530,000 through the end of this year, slashing tourism revenue by NT$20 billion (US$632 million) from the 2018 level. In a worst-case scenario, there could be 640,000 fewer Chinese arrivals, down 51% from last year.

Hotel occupancy rates could fall to a 10-year low of 59%, down six percentage points from the same period a year earlier, according to CBRE’s analysis. Since Chinese tourists began visiting Taiwan en masse, hotel occupancy rates have rarely dipped below 60%.

Hoteliers are “starting to feel the impact,” says Randy Zupanski, general manager of Shangri-La’s Far Eastern Plaza Hotel in Taipei, where Chinese visitors have accounted for about 15% of business. “As the visas run out, and there is an inability to get new visas, the impact will become more pronounced,” he notes.

Zupanski foresees a knock-on impact from the ban that will affect the MICE (meetings, incentives, conferences, and exhibitions) market – even though Beijing has not banned its citizens from visiting Taiwan on business visas. “We’ve already had some cancellations,” he says. “There’s an image issue for business groups when the Chinese government is discouraging travel to Taiwan.”

Since Chinese staff are inevitably a large part of organizations’ Greater China operations that include Taiwan and Hong Kong, Taiwan will have difficulty hosting MICE events for regional attendees as long as the ban is in place. With Hong Kong enveloped in political turmoil, Shanghai and Beijing stand to win more of the business.

Harvey Thompson, general manager of the W Taipei, says he expects the lack of Chinese visitors to adversely affect the hotel’s business during the 2020 Chinese New Year holiday. “For us, that’s a big impact – China is a key market that usually ensures we’re full throughout the holiday,” he says. Chinese visitors account for 20% of the W’s overall business.

Thompson notes that Beijing issued the ban at a time when Chinese tourism to Taiwan had been experiencing strong growth. Chinese FITs (industry lingo for “free independent travelers” rose 24% in the first half of the year to 630,000.

The impact of the drop in Chinese visitors will be felt most in Taipei, says Peter Lin, chief executive officer of Taipei-based travel agency Topology Travel. He reckons that 70% of Chinese FITs stay in Taipei.

In addition, three- and four-star hotels – which Chinese FITs tend to favor – can be expected to take the hardest hit, says Ping Lee, CBRE’s head of research in Taiwan. The key market segment of five-star hotels is more evenly balanced, she says.

Political calculations

The sudden cutoff in Chinese tourists to Taiwan took industry observers by surprise, as no single event acted as a catalyst. In contrast, China’s ruling Communist Party placed a ban on group tours a month before Taiwan’s 2016 presidential election to keep its citizens away from Taiwan’s democratic process while reminding Taiwanese that Beijing could derail the tourism gravy train at will.

Nevertheless, Tsai Ing-wen of the Democratic Progressive Party (DPP) defeated the Chinese Nationalist Party (KMT) candidate Eric Chu, who was seen as friendlier by Beijing.

This time the stakes are higher for China. October 1 marks the 70th anniversary of the founding of the People’s Republic. In the decade since its 60th anniversary, the PRC has become the world’s No. 2 economy, surpassing Japan, while steadily increasing its military and technological prowess.

In 2019, however, China’s ascendancy has slowed. The trade war with the United States and a long “deleveraging campaign” drove the announced economic growth rate in the January-March period to just 6.2%, its lowest point in 27 years.

Making matters worse for China, political turmoil has erupted in Hong Kong. Violent street protests have engulfed the semi-autonomous territory since June, fueled by the public’s discontent with years of ham-fisted administration under Beijing’s chosen chief executives.

From China’s perspective, relations with Taiwan are nearly as problematic. Beijing’s attempts to pressure Tsai have failed to bear fruit. Her approval rating reached almost 44% in August, compared to about 34% in May, according to a survey conducted by the Taiwan New Constitution Foundation.

Still, “by banning FITs, China can show its ability to influence Taiwan’s economy, putting pressure on the government,” says Topology’s Lin. “But since the measures primarily affect the hospitality sector, the damage won’t be too serious.”

Ringo Lee, head of the Travel Agent Association of the Republic of China, says “the mainland’s method will make Taiwanese people angry – it’s not the way to win their support.”

Recently, Beijing showed some flexibility by lifting the ban on FITs traveling to Taiwan’s offshore islands of Penghu, Matsu, and Kinmen. Few Chinese visit Penghu or Matsu, but Kinmen is heavily dependent on them. The fact that a sustained drop-off in Chinese visitors could devastate Kinmen’s economy factored into Beijing’s decision to lift the ban, Lee says.

“The mainland wouldn’t want to hurt Kinmen in that way, especially as the Kinmen local government has historically been friendly to Beijing,” he says.

There’s also a technical loophole in that the permit China issues to its citizens for travel to Kinmen, Matsu, and Penghu is different from the one for Taiwan, Lee notes. Permits for Taiwan remain under embargo.

Cultivating resilience

In the short term, Taiwan cannot easily offset the decline in Chinese visitors. Attracting international visitors requires time and money for promotion. Visa waivers have been in place for years for the biggest tourism markets besides China, including Japan, South Korea, Hong Kong, Singapore, Malaysia, and the United States.

One option would be to permanently waive tourist visas for all visitors from Thailand, the Philippines, Vietnam, Indonesia, and India. In the long run, that would certainly boost arrivals from those countries, which are populous, relatively close to Taiwan, and increasingly important economic partners. At present, however, those nations are not wealthy, and only a limited number of their citizens can afford international travel.

The Taiwan government has targeted Southeast Asia for increased tourism because of its large Chinese diaspora population, making for obvious cultural and linguistic links with Taiwan, says Topology Travel’s Lin. His company caters to the English-speaking overseas Chinese market, including those in ASEAN countries.

Part of that strategy is to encourage more calls by cruise ships at Taiwanese ports (see the accompanying story in this section for more details).

Ramping up domestic tourism is another option. To that end, the Tourism Bureau in August unveiled a fall and winter subsidy program forecast to generate almost NT$26 billion in revenue for the tourism industry. The program stipulates that individual travelers can receive a one-time subsidy of NT$1,000 per hotel room, but only between Sunday and Friday. Those who travel to Taiwan’s offshore islands can receive the subsidy twice, and it is available on any day of the week.

The Tourism Bureau will also offer a one-time subsidy of NT$350 for children to visit an amusement park. The amusement park operator will cover the difference, enabling the children to visit free of charge.

Additional subsidies are being made available for tour groups. Under the program, tour groups that visit specific towns recommended by the government can receive NT$500 per person per day. However, the maximum total subsidy for a given tour group is NT$30,000 in most cases. The maximum is raised to NT$50,000 if the tour group consists of travelers aged 60 or older, stays in star-rated hotels, or tours farms or factories open to the public. Tour groups visiting Taiwan’s offshore islands can receive up to NT$70,000.

While the subsidy program is certain to benefit local tourism, long-term solutions will be needed to lessen Taiwan’s heavy dependence on the mercurial China market.

In an interview with Taiwan Business TOPICS, Joe Y. Chou, director general of the Tourism Bureau, said that Taiwan “welcomes Chinese tourists” but is nonetheless diversifying its tourism source markets. He noted that Taiwan has recently opened new information centers in Russia, Australia, Vietnam, Thailand, Indonesia, New Zealand, and India. The Bureau has also opened new full-scale offices in Busan, South Korea and London, England.

Chou pointed to a recent uptick in visitors from Japan and Korea. Japanese arrivals rose 10% to a record 200,000 for the month of August. South Korean arrivals increased by 30%.

Hoteliers urge the government to work more closely with industry. At present, the Tourism Bureau and hotels promote tourism independently, says Shangri-La’s Zupanski. He suggests that a board be established that includes representatives from the government and hospitality industry.

“We need to find out where the overlap in effort is,” he says. Rather than focusing on specific facilities or programs, “we should sell Taiwan as the destination first.”

As for the Chinese FIT ban, analysts say Beijing may lift it after the January presidential election, but probably not any earlier. In the meantime, says CBRE’s Lee, the local hospitality industry is gradually growing accustomed to volatility in the Chinese tourist market.

“Taiwanese are becoming more resilient,” she says. When doing business with China, “they are learning that this type of thing happens.”

Overall, the impact on Taiwan’s economy should be manageable, economists say. Darson Chiu, deputy director of the Taiwan Institute of Economic Research (TIER), reckons that the Chinese FIT ban will cost the tourism sector some NT$35 billion. Other things being equal, that could cleave 0.2% off Taiwan’s overall GDP, estimated at NT$1.73 trillion. “That indeed isn’t very significant given the extremely strong growth in fixed capital formation this year due to the trade spat between the U.S. and China,” Chiu says.

The W’s Thompson sees one upside to the way the FIT ban was implemented. “At least they gave us a heads-up,” he says. “It happened during our budget planning time for next year.”