Lucas Schiffres | News Getty Images | Getty Images BEIJING — China’s Hainan tourism province is falling further short of lofty growth targets it set in January. At the time, the island said it was aiming for 9% GDP growth this year. But like China’s economy as a whole, growth is well below initial targets – largely due to outbreaks of a much more contagious variant of Covid. A surge in Covid infections this month forced Hainan’s seaside resort of Sanya to order tens of thousands of tourists to stay in their hotels and locals to stay at home. Haiku, the provincial capital, also issued stay-at-home orders. Airlines have canceled flights, leaving tourists stranded on Hainan Island since Saturday. In recent days, some people have been able to return to the mainland on charter flights organized by the government. But questions remain — about the uniform application of hotel stay subsidies, the cost of food and how soon most tourists can return home. “Hainan’s public image and reputation are damaged in the short term,” said Zach Penhirin, a partner in Oliver Wyman’s Greater China office. “When I talk to the customer, everyone is looking at the bookings [the upcoming fall holiday] which are still quite durable. People haven’t canceled yet, but it doesn’t look good. Probably reduced compared to last year.” “It will be bad for luxury brands and hospitality at least until next year’s Chinese New Year,” he said, referring to the Lunar New Year holiday in late January 2023.
economy of Hainan
In late July, China’s top leaders said the country may miss the GDP target of around 5.5% set in March. Beijing has signaled no large-scale stimulus or any change to its “dynamic zero-Covid” policy. The national economy grew by just 2.5% in the first half of the year, according to official figures. Hainan’s economy underperformed even at this subdued pace, growing by only 1.6% in the first half of 2022. This is a sharp slowdown from the island’s GDP growth of 11.2% for all of 2021. In fact, Hainan’s growth last year was second only to that of Hubei province, pointed out Ying Zhang, a research analyst at the Economist Intelligence Unit.
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“Due to the international travel restriction, Hainan has benefited from tourism revenue, which increased by nearly 60% last year,” he said. Zhang estimates that tourism accounts for more than 80% of Hainan’s economy. Sanya, on the southern coast of Hainan, was the top destination for couples flying from three of China’s biggest cities last week for China’s version of Valentine’s Day, according to booking website Trip.com. The island has one of the few beachfront locations for international luxury hotels such as Mandarin Oriental and Hyatt in mainland China. Hainan is also building duty-free malls as part of the central government’s drive to turn the island into a free trade hub and international trade area. Sales at duty-free shops on the island rose 84 percent last year to 60.17 billion yuan ($8.93 billion), according to official data. During a consumer goods fair in Hainan in late July, sales at four duty-free shops rose 27 percent year-on-year to 330 million yuan, the customs service said.
Another blow to confidence
So far, cosmetics brands rely far more on Hainan for sales than on affordable luxury brands — potentially up to a third of their business in China, Oliver Wyman’s Penhirin said. He said Hainan generally accounts for less than 5% of sales in China for affordable luxury brands, while high-end luxury has yet to enter that market. An Oliver Wyman survey in May found that after about two months of lockdown in the Shanghai metropolis, respondents from luxury and premium consumer brands cut their expectations for China’s growth for the year by 15 percentage points. Tens of thousands of tourists were stranded in the Hainan resort of Sanya this week as local cases of Covid prompted airlines to cancel flights. Str | Afp | Getty Images “The question is certainly when will the consumer regain the confidence and tranquility of travel and shopping, which is further delayed by this incident in Hainan,” Penhirin said, noting that he expects this month’s lockdowns to be forgotten in a or two years. “It’s more about confidence than the income itself, especially for luxury items,” he said. Meanwhile, he said brands should do more to monitor their inventory in China to make sure products aren’t being sold at levels that could spark a price war.
