Chinese dump Korea, pick Japan, on MERS fears

JUNG YEON-JE | AFP | Getty Images

South Korea, the top international destination for mainland tourists last year, may experience a shift in fortunes as an outbreak of Middle East Respiratory Syndrome forces tourists further east to Japan.

"Japan could soon exceed Korea to become the first outbound destination for Chinese," HSBC strategists said in a recent report, as the contagious disease threatens to cripple Asia's fourth largest economy.

MERS has claimed 27 lives in Korea since it first emerged a month ago, making it the largest outbreak outside Saudi Arabia. Fears of shrinking consumption, low inflation and subdued retail sales pushed the Bank of Korea to cut interest rates earlier this month and the country is widely expected to lose over $900 million in tourism revenue despite the lack of MERS-related travel restrictions from the World Health Organization.

Over 123,000 foreigners cancelled their trips to Korea in the first eighteen days of June, the Korea Tourism Organization said, the bulk of which were people from China, Taiwan and Hong Kong. That implies a more than 20 percent annual slide for Korea's total June visitor arrivals, it said, versus a 7.6 percent rise in May.

Last month, the number of mainland tourists to South Korea grew 20 percent on year, slowing from a 39 and 58 percent increase in January and February respectively.

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Meanwhile, Chinese arrivals to Japan soared 134 percent on year in May, a sharp rise from previous months, according to the Japan National Tourism Organization. That marks the first time that Chinese have dominated Japan's visitor arrivals, HSBC said, a clear indication of the tourists' shifting preferences.

Additional factors like currency arbitrage - the yen has depreciated 10 percent against the in the past year- could see Japan eclipse Korea next year, HSBC added.

Indeed, the yen's devaluation is making Japan much more accessible, said Craig Smith, president of APAC at Marriott International. "It isn't just MERS. We've been seeing an uptick in Chinese business to Japan anyways. We're now up more than 140 percent on year for the first half of the year [in Japan]."

To boot, Chinese news media have reported that Japan is the top choice for mainland travelers during the Dragon Boat Festival holiday, citing several domestic tour operators. China is closed until Wednesday for the three-day holiday.

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"Many tourists who were planning to go to South Korea changed their minds because of the MERS outbreak," online tour operator Tongcheng said in a statement, according to the Shanghai Daily. "People opted for Japan because of its new visa policy and favorable exchange rate."

Earlier this year, Japan relaxed tourist requirements, making it easier for for Chinese citizens to obtain three-year, multiple-entry permits.

The rapid wealth creation of China's middle class has sparked a travel boom, making the Chinese a force the global tourism industry cannot afford to ignore. Outbound tourist spending hit a record $165 billion last year, according to government estimates, and analysts at CLSA forecast that number to triple within the next five years.

President Park Geun-hye's administration has announced a slew of incentives in attempt to reassure travelers to Korea, such as offering free medical insurance but that's unlikely to work, noted David Beirman, senior lecturer at Sydney's University of Technology.

"There's a lot of public fear because MERS is a high mortality disease... But people need to understand that the chance of catching MERS is quite minute," he told CNBC last week.

HSBC is equally skeptical. They expect trip cancellations to continue from June through August, a peak period that accounts for 35 percent of inbound Chinese flows to South Korea.

That could see an additional 20 percent slump in arrivals during those three months while Chinese trips to Japan could show 80 to 140 percent growth, the bank estimates.

"We have heard comments that Chinese cancellations to Korea do not translate immediately to trips to Japan. We beg to differ given the evidence."