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China bets on duty-free paradise to spur domestic tourism

05/30/2016| 1:29:27 PM|

China lifts local consumption, spurs domestic tourism and spawns a duty-free paradise on the southern island of Hainan

China's efforts to lift local consumption, spur domestic tourism and keep within its borders citizens that splurge in Milan or Seoul have spawned a duty-free paradise on the southern island of Hainan that it hopes will satisfy a lust for luxury.

Firms such as the owner of the world's biggest duty-free shopping center, China International Travel Service (CITS), are capitalizing on a relaxation of duty-free spending restrictions in February, with HNA Group reporting a 160 percent surge in sales.

Government initiatives, including 19 more duty-free shops nationwide, come as sales of the types of luxury goods that line duty-free shelves fell 2% last year. Market watchers pin the blame on a campaign against demonstrations of wealth among public officials, as well as a slowdown in economic growth.

As things stand, the Chinese buy close to 80% of their luxury goods abroad in cities such as Paris, London and Tokyo, Bain Consultancy estimated.

"Whether it is Burberry or Richemont recently, many brands in the space have noted that the future of luxury demand will be about the Chinese and incrementally at home," said HSBC analyst Erwan Rambourg in Hong Kong, who recommends buying CITS shares.

Less choice

In Hainan, which is closer to Hanoi than Beijing, duty-free shops offering products priced as much as 30 percent less than the mainland have been operating since 2011, under a trial program aimed at developing the island as a tourist destination.

Customers could initially only buy up to RMB 8,000 (USD 1,220) worth of duty-free goods, twice a year. From Feb. 1, they have been able to make purchases any time of the year provided the total does not exceed RMB 16,000. At the same time, stores have also been able to sell goods online for collection at airports.

In Hainan's provincial capital Haikou in the north of the island, HNA's duty-free sales have since rocketed.

In the island's city of Sanya, state-controlled CITS opened the country's first duty-free shopping center in 2014. The skylit, flower-shaped edifice is about nine soccer pitches in size and filled with shops stocking over 300 brands including from Burberry Group and Compagnie Financiere Richemont SA, as well as goods such as baby formula.

"It's definitely much cheaper," said 20-something handbag shopper Zhang Pei Pei, "But the choice of products is less."

Hotel rush

Hainan's balmy climate and over 60 beaches is a draw for developers, with Sanya on the island's southern tip dotted with luxurious resorts completed or under construction. That city - three times the size of Singapore - has over 1,000 hotels with 30 more due to open in its Haitang Bay area in the coming years.

One of those is the $1.7 billion Alantis project of Chinese conglomerate Fosun International and the owner of South Africa's Sun City casino resort, Sol Kerzner.

"Fosun is optimistic in the future development of Sanya," the company said in an email to Reuters.

Near the capital Haikou, property and aviation conglomerate HNA plans to develop a deep-water port, international sports stadium and motor racing circuit, as well as an artificial isle similar to Dubai's Palm Islands.

Its aim is to become the country's first duty-free retail brand, HNA said in emailed comments.

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TAGS: Hainan | Sanya | Fosun | HNA Group | duty-free stores
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