Yuan’s devaluation threatens Macau and top U.S. destinations

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Yuan declining
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The recent devaluation of China’s yuan is threatening to further erode tourism and spending numbers in Macau and curb the growth of travel in a country that in recent years has been the most rapidly expanding overseas source market for U.S. travel spending.

As a result, should the yuan not re-strengthen, the impact is expected to be felt in many tourist destinations in the U.S., most dramatically in Hawaii.

The downturn has already hit the bottom lines of U.S.-based hotel-casino operators Las Vegas Sands and MGM Resorts International, and both might have to brace for further earnings declines from their Macau resorts if spending from mainland China, which accounts for about two-thirds of Macau’s visitor numbers, fails to return to pre-devaluation levels.

The devaluation, the largest in two decades, dampens earlier predictions that the number of Chinese visitors to the U.S. would double during the next five years, which  would have been a boon for favorite destinations among Chinese travelers, such as New York, San Francisco and Las Vegas.

China’s purchasing power abroad had surged in recent years as the country’s middle class grew and the yuan increased in value from about 12 cents in 2005 to a high of about 16.5 cents in early 2014.

With the value of the currency having settled at about 16.1 cents, the Chinese government, looking to spur international demand for its goods, on Aug. 11 instituted the largest single-day devaluation of the yuan since 1994 by devaluing it by about 2%. As of last Wednesday, the yuan was trading at about 15.7 cents, or about 4% lower than a year earlier.

Hotel-casino operators in Macau have already felt the impact of lower spending by Chinese tourists. The territory’s visitor arrivals through July were down 3.5% from a year earlier, to 17.4 million, with visitor arrivals from mainland China falling 4.5%, to 11.5 million, according to the Statistics and Census Service of Macau. In July, the number of mainland China visitors to Macau fell 6.1% compared with a year earlier.

As a result, Las Vegas Sands, the largest U.S. hotel-casino operator, said its second-quarter net income dropped 30%, while revenue declined 19%, to $2.92 billion, largely because of lackluster Macau results.

MGM Resorts’ second-quarter net income fell 11%, while revenue was down 7.6%; revenue from the company’s Macau operations plunged 33% from a year earlier on worsening results from both VIP table games and floor table games.

“The major risk to Las Vegas Sands is a slowdown in growth in China and general Chinese wealth creation,” UBS analyst Robin Farley wrote in a note to investors after Sands’ second-quarter earnings results were released in late July. “Gaming operators with large exposure to Macau are also exposed to risks in the junket system, which is responsible for driving the vast majority of VIP play in the region.”

How that devaluation and potential spending decline from China affects U.S. tourism numbers remains unclear. Last year, the U.S. received 2.19 million inbound travelers from China, the sixth most from any country. That marked a 21% jump from 2013, according to the U.S. Commerce Department.

Measured by inbound travel spending, China was second only to Canada, as Chinese tourists boosted spending by 13% last year, to $23.8 billion. By 2019, the number of inbound China tourists has been projected to double, making it the fastest growing source of tourists to the U.S. China is expected to leapfrog the U.S., U.K. and Germany to become the world’s largest source market for long-haul travelers by 2020.

Much of that jump has been forecasted for coastal U.S. cities. Earlier this year, InterContinental Hotels Group (IHG), citing an Oxford Economics study, forecasted that the number of Chinese tourists visiting New York, Los Angeles and San Francisco would all triple in the next decade.

IHG made that forecast as it debuted what it called its “China Ready” program at more than 80 of its global properties, including InterContinental properties in Boston, Chicago, Los Angeles, San Francisco and Washington. The program’s amenities, which are slated to be expanded downscale to more properties such as Holiday Inn hotels, include serving the rice porridge known as congee for breakfast, hiring Mandarin-speaking staff and offering Chinese TV stations and an extensive tea selection.

How the devaluation and potential spending decline from China affects U.S. tourism numbers remains unclear. Last year, the U.S. received 2.19 million inbound travelers from China, a 21% jump from 2013.

Already, Hawaii tourism officials have taken note of the potential impact of a sector that now accounts for about 2% of the state’s visitors. While Hawaii’s total visitor arrivals were up 1.6% last year, to 8.31 million, the number of visitors from China surged 28%, to about 160,000, according to the Hawaii Tourism Authority.

“A slowing of China’s economy and fluctuations in the domestic and international stock markets, coupled with the strengthening of the U.S. dollar, could impact both our domestic and international visitor arrivals and spending trends,” the Hawaii Tourism Authority stated late last month. “We continue to work with our global market contractors to adjust our marketing efforts in response to these economic factors.”

For San Francisco in particular, inbound travel from China had been growing at about 25% a year and was poised to reach about 400,000 people this year, or about 2.2% of the tourism market. Hubertus Funke, vice president at the San Francisco Travel Association, the city’s tourism board, downplayed the immediate impact of the yuan devaluation, as such trips are usually booked and paid for a few months in advance.

China’s tourism surge also had been notable in Las Vegas. While the number of Las Vegas’ international visitors has doubled in the past decade, the number of inbound visitors from China quadrupled to almost 190,000, according to the Las Vegas Convention and Visitors Authority (LVCVA).

Las Vegas tourism officials put on a brave face, saying that any potential drop in China leisure tourism to the city because of the devaluation could be offset by a boost in the local convention market.

“China is still a manufacturing economy, and producers will seek to export their products no matter what the exchange rates are,” said Peter Phang, managing director of the LVCVA’s China Representative Office.

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