CNBC's The China Connection newsletter: Tourism surge defies consumption slowdown

If people are spending in China, it's likely to be on travel — and businesses want a slice of that.

After 10 years as the only hostel in China's Datong city, Fly by Knight suddenly gained six new competitors in one year, according to founder Daniel Huang. He said his 26-room venue was booked out for the May Labor Day holiday, which officially ran from Thursday to Monday.

"Hotels are opening everywhere in Datong," he said, noting that one no-brand operator raised its prices for the holiday by more than five times to over 1,000 yuan ($140) a night.

Surging interest in history and culture is helping. The popularity of Datong's Yungang Buddhist grottoes — a Unesco heritage site from around 1,500 years ago — skyrocketed after its statues were featured in the hit video game Black Myth: Wukong released last summer.

More than 43,700 people visited the caves on May 1 alone, up over 10% from a year earlier, according to state media. The Grand Canyon averaged 13,477 visitors a day last year.

The latest holiday shows young Chinese tourists remain very interested in museums and other cultural activities, said Ashley Dudarenok, founder of ChoZan, a China marketing consultancy.

"What it means for international brands or local brands is that collaborating with those cultural icons is still a very, very important part of connecting with the consumer," she said.

Nationwide, China reported 314 million domestic tourist trips over the May Labor Day holiday, continuing the steady increase in recent years and well above the pre-Covid level of 195 million in 2019. The government has extended the holiday in recent years, giving locals more time off as businesses typically offer employees only a handful of paid vacation days.

China's recently built transportation infrastructure is encouraging locals to visit smaller cities such as Datong, Huang said. He pointed out that before the Covid-19 pandemic, travelers had to take a six-hour train from the capital city of Beijing to Datong.

Now, a high-speed train between the cities (about $20 per one-way ticket) takes less than two hours, with dozens of departure times throughout the day. The train route opened in December 2019.

Tourists in China have been turning to less popular, more remote destinations that tend to be cheaper than visiting large cities. During the latest May Labor Day holidays, trips to rural areas rose by nearly 20% from a year ago, with interest in farm-themed stays surging, according booking site Trip.com.

Retail sales, including food, rose by 6.3% during the holiday from a year ago, according to official figures. Tourism revenue increased by 8% to 180.27 billion yuan.

"Despite concerns over macroeconomic headwinds, the strength of travel numbers tells us that consumer sentiment is resilient," said Jacob Cooke, co-founder and CEO of WPIC Marketing + Technologies. The company helps foreign brands — such as Vitamix and IS Clinical — sell online in China and other parts of Asia.

"Chinese consumers are prioritizing spending on what matters most to them -- and right now, that includes travel," he said.

When Chinese consumers were asked where they expected to increase their spending this year, travel topped the list, followed by groceries, according to a survey conducted on behalf of financial services firm TD Cowen in February and published last month.

However, in a sign of lingering uncertainty, fewer respondents than last year said they had made travel plans for the next six months. The survey covered 2,000 Chinese residents.

Sales of retail goods have remained tepid since the Covid-19 pandemic, up by just 3.5% last year, according to official data. The services sector, including tourism, sports and childcare, has seen faster growth at 6.2% last year. China started reporting services retail sales on a year-to-date basis in July 2023.

Chinese cities have meanwhile stepped up their efforts to attract tourists, whether through short videos on social media, virtual reality experiences or elaborate light shows splashed across skyscrapers.

Some cities, such as the panda hub of Chengdu, are starting to use drones for delivering food within scenic parks, or renting out robotic-powered hiking support, Dudarenok pointed out.

"We're going to see basically a lot of what the future of tourism is going to look like, and China is testing that massively over this May day holiday," she said, noting that places that have invested a lot are seeing robust tourist numbers.

Chengdu, for instance, claimed a 6.2% year-on-year increase in tourist trips over the holiday to 15.52 million. That's nearly three-fourths of the city's population of 21.4 million, as of 2023.

Social media influencers, as well as word-of-mouth comments about cleanliness and safety are also helping Chinese cities attract foreign travelers, Huang said.

Huang said his hostel primarily served international visitors prior to Covid, and the share of foreign guests has recovered modestly to about one-fifth of customers. Local visitors tend to concentrate their travel during public holidays, while trips by foreign tourists are more spaced out, he said.

China has expanded its visa-free policies in the last two years to attract foreign tourists. Citizens of the U.S., U.K., Canada and more than 50 other countries can now stay in China for 10 days without a visa, while people from Japan, South Korea and several European countries can visit for up to 30 days.

Inbound travel to China around the May Labor Day holidays rose by more than 40% from last year, according to Hostel World. The data showed Chongqing, Yangshou and Guilin surged in popularity versus Beijing and Shanghai.

The U.S. and China are finally going to talk on trade. It's not a presidential call, but both sides confirmed that Chinese Vice Premier He Lifeng, Beijing's top official for China-U.S. economic and trade matters, will meet with his U.S. counterparts while visiting Switzerland later this week.

Ten people died after four tourist boats capsized in southwest China's Guizhou province. Vice Premier Zhang Guoqing on Monday visited the site of the accident, which state media attributed to "sudden strong winds."

China's National Health Commission is investigating a hospital scandal. The probe, involving a senior physician at a prestigious hospital in Beijing, stirred discussion on Chinese social media about the potential role of connections in obtaining highly sought-after healthcare positions.

Alibaba's Taobao e-commerce site has joined the on-demand delivery fray. The company is rolling out same-day delivery of food, clothing and other products, just days after JD.com and food delivery company Meituan ramped up their competition in the space. Taobao claimed it received more than 10 million orders in one day.

Chinese and Hong Kong stocks climbed Wednesday after the People's Bank of China and financial regulators announced sweeping plans to cut key interest rates as they strive to shore up growth.

China will cut the seven-day reverse repurchase rates by 10 basis points to 1.4% from 1.5%. The central bank will also lower the reserve requirement ratio by 50 basis points.

Mainland China's CSI 300 was up 0.44% while Hong Kong's Hang Seng Index — which includes major Chinese companies — rose 1.5% as of 10:30 a.m. local time. The CSI 300 has lost roughly 2.8% while the Hang Seng Index has gained over 14.6% so far this year.

The benchmark 10-year Chinese government bond yield was slightly down at 1.63%.

The offshore Chinese yuan strengthened 0.18% against the greenback to 7.2227.

The performance of the Shanghai Composite over the past year.

May 7-10: President Xi Jinping pays a state visit to Russia

May 9: China's import and export data for April

May 10: China's consumer price index and producer price index for April