The volatility of China’s pandemic recovery might leave some companies and investors looking for a way out — and several have.For more TPG news delivered each morning to your inbox, sign up for our daily newsletter.Airbnb is leaving the domestic Chinese market at the end of the month. While the vacation rental platform gave no specific reason, the Global Times reported it was too expensive to operate there and the pandemic exacerbated the complexities of doing business.U.S. investment firm the Carlyle Group plans to reduce its exposure to China by as much as half in an $8.5 billion fund targeting opportunities in Asia — less than a year after the organization noted the country for its opportunities.But the hotel industry is a notable exception.Accor just announced plans to open more than 400 Mövenpick hotels in China. This comes after the CEOs of Marriott, Hilton and IHG Hotels & Resorts have all touted China as a leading growth opportunity for their respective companies. Industry experts say that is unlikely to change.Even with the country’s stringent ‘COVID zero’ policy that sends cities into lockdown for significantly fewer case spikes than what you see in the U.S., the growth opportunities for brands in China are too great.More than a third of all the hotel rooms under construction at the end of last year were in China, according to Lodging Econometrics.“[Hotel companies] all kind of see it in quite a similar way,” said Harry Martin, a vice president of equity research at investment research and wealth management firm Bernstein. “The strategy has been to make China a second domestic market that looks very similar to the U.S.”Sign up for our daily newsletterEmail addressSign upI would like to subscribe to The Points Guy newsletters and special email promotions. The Points Guy will not share or sell your email. See privacy policy.Western brands in Europe have a reason to expand there because it means travelers from abroad — like Americans locked into any given hotel company’s loyalty program — can stay within their network of various brands.This greater reliance on international travelers is why Europe typically lagged both the U.S. and China in its hotel recovery from the pandemic.However, China, like the U.S., has an enormous domestic population. That’s a massive opportunity for brands to go in and expand to target domestic travelers taking vacations across China — especially as the U.S. is widely seen across the industry as reaching its limits in how much further existing brands can grow.This is the driving idea behind deals like Hilton’s partnership with Chinese developer Country Garden to add 1,000 hotels across China over the span of a decade.Marriott’s China expansion has averaged roughly 40 new hotels per year in the last three years, and that figure is expected to increase to 50 in 2022. IHG also sees China as an important part of its quest to return to record-setting growth following the pandemic.“This year will be volatile, and it could spill over a bit into next year,” IHG CEO Keith Barr told me earlier this year. “But we run this business for the long term, and I wouldn’t stop investing in China.”Having a greater presence in China also means expanding the likelihood of Chinese travelers sticking to that company’s loyalty program when they travel abroad — whenever China’s borders reopen, that is.“If you think about the next 10 or 20 years, it’s much more important to have brand appeal to Chinese travelers traveling abroad than it is about Americans,” Martin said.Second thoughtsThis doesn’t mean hotel companies aren’t losing any sleep with respect to China. Hotels there performed better last week than they have in months, but it was still down 22% compared to the same week in 2019, according to STR data.By comparison, European hotel performance was up 16% and U.S. hotels were just under 2019 performance levels (which analysts chalk up to a calendar shift with the July 4 holiday).China’s underperformance compared to the two other markets is largely attributed to lockdowns and travel restrictions stemming from the latest outbreak of omicron variant cases in various parts of the country.“I think for a lot of businesses, having skin in the game in China today — having investments, not just licenses or franchises, but having genuine, true investment capital there — anybody who’s invested there would have second thoughts going forward for an extensive period of time,” said Nicolas Graf, associate dean at New York University’s Jonathan M. Tisch Center of Hospitality.“The property sector is kind of up and down. Nobody knows the value of anything in China when it comes to real estate today.”Of course, Graf noted that most Western hotel companies don’t have much of their own capital investment in the region. While they might have a corporate office, hotel companies largely steer clear of investing in the real estate component of their expansion.Instead, they license out their branding rights to property developers. That makes it easier for hotel companies to weather the storm of lockdowns compared to the folks who actually own the property.“They’re all asset-light over in China, so the risk exposure is only the headquarters they have over there,” Graf added. “Companies that have more skin in the game — that’s going to be different [like with] some of the gaming companies in Macau. That may be different, but the traditional hotels? Not so much.”Long story short: The upside of growth that should happen whenever China’s cities are open far exceeds the short-term performance drag from pandemic lockdowns.
