China's inflated spending figures

Along with high levels of inward investment and a substantial trade surplus, tourist arrivals to China have become a major contributor to the surplus on the country's capital account. In the first 10 months of 2002, China's foreign exchange reserves rose from US$212.2bn to US$265.5bn. Hard-currency revenue from overseas visitors, at US$17bn, accounted for nearly a third of the increase-giving the tourist industry a significant role in shoring up China's macroeconomic stability. On a closer look, however, official statistics for the sector reveal some striking discrepancies.

Since China defines overseas arrivals to include residents of Hong Kong, Macau and Taiwan, the tourism data captures two distinct categories of visitors: overnight stayers and day-trippers, with most of the latter group coming from the two special administrative regions. Much of this type of travel reflects cross-border excursions to shop for lower-priced consumer goods in Guangdong province.The CNTA does not disaggregate its published tourist arrival figures, although it does give detailed figures for hard currency spending by both long-stay and single-day visitors.

At first glance, the CNTA data leads to some unsurprising conclusions. Visitors from Hong Kong, Macau and Taiwan accounted for more than half of China's tourism income over the period January-
October 2002, the latest for which monthly figures are available. Within this category, the growth of revenues from Taiwanese visitors has been particularly marked, most likely reflecting the weaker economies of Hong Kong and Macau.

But the official data also contains some striking anomalies. CNTA's reported figures for hard-currency revenue from foreign tourism imply daily spending rates that look astonishingly high�and are inconsistent with the more plausible estimates published
by CNTA itself.

The gap is largest for the smallest of all arrival categories: visitors from Macau. CNTA reports that overnight visitors from Macau spent a total of 1.87m person-days in China during January-
October 2002, spending US$1.64bn in hard currency while there. This implies a rather breathtaking daily budget of more than US$875 for the average traveller from Macau. However, CNTA also provides unsourced estimates of average spending by Macau visitors, which it gives as just over US$102 a day for overnight tourists (and only US$27 for day-trippers).

The same disparity exists in CNTA's income figures for tourism from Hong Kong,Taiwan and overseas, although these are far less dramatic than in the case of Macau. It's worth noting, moreover,that the aggregate figures are in principle less subject to error than the per-day figures, which in the past have been collected by sampling methods (including a major survey of more than 40,000 foreign tourists conducted between March and July 2000, mainly through visits to foreign-invested hotels).The Ministry of Public Security provides China's tourism authorities with comprehensive records of all legal arrivals and departures by non-PRC nationals, and the State Administration of Foreign Exchange has equally complete records of all lawful currency exchanges carried out by tourists.

It appears that China's hard currency income from foreign tourism has been greatly overstated � particularly since almost 10 per cent of its tourism revenue in the January-October period is
attributed to visitors from Macau, which has a population of just 462,000.The aggregate figure of US$1.64bn, in fact, implies an average expenditure on China travel of just over US$3,500 for each
resident of Macau during this 10-month period, or more than onequarter of the city's GDP.

It appears that large and unexplained inflows of capital into China are being incorrectly reported to SAFE as currency exchanges to cover tourists� personal expenses, with visitors from
Macau playing a disproportionate role in the anomaly.Two possible explanations suggest themselves.

Casino gambling dominates Macau's economy, and since many punters are outbound tourists from China itself, the gaming sector is likely to create a heavy demand for black-market currency conversion in both directions, as mainland gamblers buy patacas on arrival and later sell them to repatriate their winnings (if any). But this sector should not generate a net capital outflow from Macau, since gamblers on average must leave the casinos with less hard currency than when they arrived.

Another possibility is that some visitors are making unauthorised investments in China, or allowing themselves to be used as conduits for others who wish to do so. But this explanation also seems inadequate, since the main forms of investment available to holders of yuan � the A-share markets and local bank deposits � offer higher risk or lower rates of return than other asset classes available to those with foreign currency, including lawful FDI projects in China. Nor is it obvious why this form of exchange-control evasion, even if profitable,would be dominated by Macau, rather than by the traditional sources of China's inward investment, Hong
Kong and Taiwan.