Just like many financial institutions and peer-to-peer (P2P) platforms promise high returns to attract investors, some travel agencies are offering overseas trips for free or at highly discounted prices to bring in funds. While free trips in lieu of interest payments seem to have grown in popularity among middle-aged and elderly people, experts warned that the risks remain high for investors.
Nothing is better than a free trip abroad, except maybe two.
Wang Ying (pseudonym), a Beijing resident in her 50s, just came back from South Korea - her second free trip this year.
"Except for a small guide service fee, I didn't need to pay for the flights, meals, hotels, visa fees or other expenses, and I enjoyed the trip very much," Wang told the Global Times on Sunday.
But as the saying goes, there's no such thing as a free lunch. In exchange, Wang was required to park tens of thousands of yuan at the travel agency for several years.
Wang declined to disclose the details of the deal, including the name of the travel agency as well as the amount and duration of her deposit, because she signed a confidentiality agreement.
Generally speaking, a free U.S. West Coast tour requires a one-year deposit of about 100,000 yuan ($15,031), said a travel industry veteran surnamed Sun. As the manager of a Shanghai-based travel agency, Sun preferred to keep his full name and company name anonymous due to the sensitivity of the issue.
Much like financial institutions and peer-to-peer (P2P) platforms promise high returns to lure Chinese investors, some travel agencies are giving away overseas trips for free or at highly discounted prices to attract money from middle-aged and elderly people. While free trips in lieu of interest payments for deposits seem like a bargain to many, experts warned the risks are high.
Drawn in by good deals
The deposit-for-trip business model has received a warm welcome from travelers, especially from middle-aged people, because it caters to the growing demand in China for traveling abroad, Sun said.
There has been explosive growth in outbound tourism in China in recent years.
In 2015, travelers from the Chinese mainland made a record 120 million overseas trips, according to a report jointly released by the China National Tourism Administration and the United Nations World Tourism Organization in March.
Middle-aged and senior people are especially interested in traveling abroad, said Zhang Lingyun, director of the Tourism Development Academy at Beijing Union University.
"The generation of people over 50 lived a hard life in their youth. Now that the economy has improved and they have free time, it's understandable that they want to travel abroad," Zhang told the Global Times on Monday.
Moreover, many believe they got a bargain by parking money at the travel agencies.
Ding Lin (pseudonym), another middle-aged Beijing resident, has already traveled to several countries without paying any tour fees and is now preparing to take another trip to the U.S.'s West Coast.
Ding just signed up for a new deposit-for-trip package, which required him to deposit 40,000 yuan for six months at the agency to get free trips to South Korea and Japan, as well as a discounted trip to the U.S. That trip was valued at 18,000 yuan, but because Ding had deposited money at the travel agency, he got it at a discounted price of 8,000 yuan.
Of course, it might not actually be a discount, Sun said. "They could be inflating the list price to make the deal look good because a trip to the West Coast in the U.S. usually costs only about 7,000 yuan," Sun told the Global Times.
As a bargain hunter, Wang did her own research.
"I know the market price ranges for these tours. They can't cheat me," she said, noting that the salesperson calculated the interest payment on her deposit based on an annualized return of 4 percent, and the result showed that the free trips are a great deal."
However, Sun pointed out that Wang could probably get a return of far more than 4 percent if she invested her money elsewhere, so the figure isn't a good yardstick to gauge whether the deal is a good one.
Risky business
The deposit-for-trip business only recently emerged in the Chinese travel market. According to Sun, it started in Beijing when banks began cooperating with travel agencies to lure in depositors.
In November 2014, Ping An Bank, working with the travel booking website wglvw.com, began offering free overseas trips for deposits at the bank.
In one case, it offered a six-day trip to Japan in exchange for a three-year deposit of 30,000 yuan or five-year deposit of 20,000 yuan, according to an online advertisement. In another, it offered six-day trip to Hawaii in the U.S. in exchange for a three-year deposit of 85,000 yuan or five-year deposit of 55,000 yuan.
Other banks were quick to follow. In March 2015, the Beijing branch of Industrial Bank struck up a similar partnership with Beijing Haitao International Travel Agency Co.
However, after China's central bank lowered the benchmark interest rate 2.75 percent in November 2014 to the current 1.5 percent, the banks dropped the promotion.
When the Global Times visited the offices of Haitao Travel Agency and wglvw.com in Beijing this week, staff from both companies said they don't offer free trips in exchange for deposits because they are not allowed to do so.
But Sun said some travel agencies still do the business, albeit in secret, because they know they are operating outside the rules.
After all, offering free trips in exchange for deposits is a risky business, Zhang said. Because travel agencies are not authorized to be in the finance business, there's no guarantee that travelers will be able to get their money back if something goes wrong.
People who deposit money in a travel agency are taking a huge risk because they have no idea where their money is going. Some believe that these travel agencies, like P2P lenders, are sinking their clients' deposits into high-return - and likely high-risk - investments or China's shadow banking sector, but Sun said the travel agencies are actually using the funds to lower their own financing costs.
The travel agency business requires a great deal of liquidity to stay competitive because they have to secure cheap flight tickets and hotel rooms by paying for them at least several months in advance. However, they won't make a profit on those flight tickets and hotel rooms until they sell them on to clients sometime later.
Because of this gap between expenditure and payment, they need money for an extended period to cover these costs. Due to this substantial liquidity demand, travel agencies usually borrow money from banks or other sources at an annual interest rate of about 12 percent. That means a travel agency can save as much as 12,000 yuan on financing costs by securing a 100,000 yuan deposit from a client, Sun said.
Still, there are risks to the lender. "Like some of the P2P platforms, if the capital chain breaks, executives flee," Sun said.
